One Of The Best Ways to Manage Risk Is…

Although stocks rebounded nicely Tuesday and the major indices appeared to regain their footing, we need to keep in mind that the August/September time frame tends to be tough sledding in the stock market. And with approximately 40% of the stocks in the S&P 500 down at least 10% from their highs, one can argue that we remain in correction/pullback mode.

The good news is that the S&P 500 opens on this fine Wednesday morning a mere 1.14% from the all-time high set early in the month. The point here is that while yesterday was fun, we need to accept that this corrective phase may not have ended just yet.

Sure, I can argue that the recent dance to the downside was just the type of pause that can refresh the bullish mood as some of the complacency was washed away. However, with Trump threatening to shut down the government unless he gets his wall built and the debt ceiling fast approaching, well, this may not be the best time to abandon a cautious stance.

Speaking of which, before I was consumed with the move, we were exploring a few different ways to manage risk in one’s portfolios. We first talked about what I will call the “BlackRock Method,” which entails utilizing a lower volatility approach in your equity exposure both here at home and overseas.

BlackRock’s research shows that utilizing “low vol” indices (the iShares Min Vol USA ETF – USMV – would be the poster child for this) is a great way to ride the market during bull cycles and to “lose less” during those nasty bear phases.

While I applaud BLK loudly for their public stance telling investors that managing risk is mission critical in the long run, I personally am concerned that the “low vol” space may have become overly popular during this specific bull market.

If you will recall, this has been one of the most hated bull markets in history due to the seemingly endless stream of crises (most of which stemmed from the PIIGS and the European banking system) that arose from 2009 forward. As such, a great many investors decided that if they were going to be invested in stocks, they would do so in a more conservative fashion. Enter the “low vol” and “high dividend” trade.

The problem, from my point of view, of course, is that this may have become a very crowded trade. As such, when the bears do come to call again (and trust me, they will at some point), these more conservative indices may not provide the downside protection they did in the past as everyone tries to flee from the same place.

It is important to recognize that no single investing strategy/methodology works during all market environments. And if you aren’t sick of hearing me preach this message, do yourself a favor and reread the prior sentence. Or better yet, write these words on a sticky note and spack it on your computer screen so that you can be reminded of this message before the opening bell rings each day. In short, I believe this is probably the most important lesson investors need to learn if they expect to succeed over the long-term.

Repeat after me… There is no Holy Grail of investing! Trust me, no matter how smart you, how many letters you have after your name, are or how hard you try, you will not discover the secret to getting every move in the stock market right. P.S. There is no “all weather” strategy that works all the time, either. So, please run far, far away, as quickly as you can, from anyone who suggests otherwise!

One risk management firm I spoke with recently suggested that their approach to capital preservation during market declines works in 4 out of 5 bear market environments. To me, this was very refreshing to hear because, in my experience, this concept is spot on – no matter what method you employ to manage risk, there will be an environment where the approach gets “fooled” and fails to fully do its job.

It is for this reason that I am a proponent of utilizing multiple strategies in order to create portfolios that are diversified in a modern fashion (i.e. diversification that goes beyond using multiple asset classes).

And this, dear readers, is, in and of itself, a very strong way to manage the risk of severe bear market declines. It’s simple, really. Don’t put all your risk management eggs in a single strategy/methodology basket. Instead, diversify by employing multiple risk management strategies in your portfolio.

Tomorrow, I’ll talk about another specific strategy, something I call the “exposure method.” After that, we’ll explore some other ideas such as trend-following, the use of Alts, and an oldie, but a goody, the 60/40 method.

Thought For The Day:

Go in the direction of your dreams. Live the life you’ve imagined. -Thoreau

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Trump Administration

      2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

      3. The State of Geopolitics

      4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

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