Wealth is most often built through risk-taking, hard-work, blood, sweat, and tears, so never be passive about its management and preservation! My 90’s Bull and Bear artwork was unearthed this weekend from a dusty box. The old pic was an early career motivator to keep me focused on serving financial advisors and private clients no matter the market direction.
Always be PROACTIVE with the proper balance of capital appreciation and rewards as well as wealth preservation and risks.
A market sell-off swept Asian-Pacific stock markets Monday, led by China’s Shanghai Composite, which gave up 8.5%. Hong Kong’s Hang Seng Index dropped 5.2%, Japan’s Nikkei 225 lost 4.6%, Australia’s S&P/ASX 200 fell 4.1%, South Korea’s Kospi declined 2.5%, India’s Sensex was down 5.8%, and U.S. Dow Jones Industrials dropped over 1,000 points on the open. Market volatility, as witnessed by the widely followed VIX indices, had the greatest week to week percent increase on record. As expected, all kinds of assets start to correlate-downward.
This Post is not about fear or encouraging unnecessary action: It is also not about complacency or ignoring the world around us. Families deserve, require, and desire financial stewardship.
Three Things You Can Do Right Now
- Check Your Risk Attributes. Security-level modeling is fine; however, I suggest you heighten priority on portfolio-level characteristics like forward-looking valuation ratios (reward-to-risk, price-to-sales, PEG, Yield), draw-down metrics (return dispersion, Sharpe & Sortino, duration, value-at-risk, up/down capture), and sensitivities to varied economic scenarios (including disinflation & recession). Know where you stand — Is your portfolio suitable and aligned with expectations of the future (long and short-term)
- Cash is King, Queen, Prince & Princess. The appropriate “pruned” level is investor-centric; however, cash tends to be the simplest and most effective method to satisfy volatility reduction and emotional satisfaction. Why not target a security you never liked anyway, has above-average fees, or generally was not a complementary fit? The psychological impact of taking action (no matter how small) is often rewarding.
- Tax-Loss Swaps. In taxable accounts, when multitudes of securities experience large moves down, it makes a lot sense to capture paper losses, turn them into an economic benefit for the future (carry-loss forwards can even offset a little ordinary income) and immediately regain market exposure through another equally attractive security. This is one of the great proactive moves you can make in this market without attempting market timing or outguessing new moves from the People’s Bank of China.
A Few Pictures to Contemplate
The character of the world’s financial markets has changed as easily seen through market breadth, volatility, and sentiment; therefore, it is generally smart for investors to at least appreciate that expectations should adjust. The $4.4 trillion U.S. Federal Reserve balance sheet shown above is one anecdote that clearly illustrates the unusual and unprecedented nature of our economic world. For this reason, and even though I am a student of market history, I cannot accept advice like “this is just a normal and healthy pullback.” The world’s central banks have not a clue how to unwind this experimental game. See, Don’t Roll the Dice with Your Retirement.
The 2015 summer market selloff is blamed on a powerful U.S. dollar surge versus other currencies, plummeting commodity prices (led by oil), earnings and GDP slowdowns in China, Europe, Japan, and the United States. Incoming data is fairly mixed; however, the distribution of risks to global economic activity is still tilted to the downside with deflationary forces gaining momentum.
It only takes one snowflake to cause an unexpected avalanche.
Three More Points to Think About
- Know Thy Messenger. As you seek guidance and read commentaries, watch for biases and conflicts. This is true whether listening to someone who is always talking market crashes or Armageddon, a strategist paid to keep you in their firm’s asset management products, or a salesperson disguised as an “advisor.”
- Proactive Preparation, Reaction, and Communication. It may not be necessary to change your asset allocation, safety cash levels, or solid financial plan based on 2015 market dislocations. An allocation to “passive” and “cheaper” index investing has its place, too. Still, organization, scrutiny, and awareness of your portfolio’s expected rewards & risks, diversification, liquidity, credit, leverage (direct or indirect), and fees (on the statement and hidden) is important. How else will you know if a “reaction” is warranted? Whether an advisor(s) is present or an investor is self-reliant, other interested parties (like spouses and children) benefit from an increased level of awareness and communication: where we stand, the game plan, how we implement said plan, and the method of supervision/monitoring.
- Focus on the More Controllable vs. Less Controllable. Most of us do well to place energy in estate and tax planning, social security strategies, and the fundamentals of diversification and risk management. Even if you 1) knew the exact outcome of potentially significant market moving events like the September Federal Reserve meeting or a surprise People’s Bank of China stock market intervention, you still have to 2) guess market reactions and then 3) the duration of those reactions. That’s a difficult trifecta!
In 1995, an early mentor required me to read and hand record daily levels of copper prices, 10-year bond rates, major currency levels, and about 70 other market inputs. I am not suggesting you watch that closely; however, a proactive approach with your hard-earned wealth is warranted!
ABOUT THE AUTHOR:
Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.
Email | Michael@empoweredportfolios.com
Twitter | @MichaelHakerem