I decided to send out this concise market update today because market technicals in the stock and bond market have deteriorated significantly. I am not going to bore you with a lot of charts that highlight what I am looking at. I will save that for my November 5, 2018 newsletter.
In summary, the S&P 500 fell almost 7% peak-to-trough last week, but that does not tell the full story. Market leading industry groups like Semiconductors and Broker/Dealers have been underperforming and have broken down out of consolidation patterns. Market breadth has deteriorated and volatility has spiked higher. International markets have underperformed our market all year, and now look like they could be leading our market lower. For example, the German DAX (which is highly correlated to our market) has completed a head-and-shoulders topping pattern.
If the stock market breaks significantly down through the lows of last week, I believe the odds are high that we could be entering a bear market. Even if we are not entering a bear market now, I feel that we are in the latter stages of the current bull market, and thus the next bear market is probably not that far away. Because of this, risk management is of paramount importance to any investor that is in or near retirement! So let’s talk about risk management.
If you are using a buy-and-hold investment strategy, you don’t control your losses. Your account will rise and fall with the market. This is not a big deal if the market is rising, which it does most of the time; however, when we enter a bear market, using this strategy historically produces substantial losses. I backtested a sample balanced portfolio of 50% stocks and 50% bonds using popular ETF’s to see how it would have performed in the last bear market (2008). That portfolio fell about 29.7% over just under a year and a half. If you are in retirement you are probably withdrawing income which will add to those losses. If you lose 33%, you need a return of 50% just to get back to break even. How difficult is that for a retiree who is invested conservatively and pulling income?
So for any investor that is using a buy-and-hold strategy, you need to ask yourself today: Am I comfortable with a 30% loss in my account? If you are not, then you need to start looking for an alternative strategy now!
The biggest difference between how I manage money for my clients and the traditional buy-and-hold method used by most investors is Risk Management. Our focus is on preserving capital during major stock and bond market corrections.
If you have any questions or would like me to review your portfolio, please feel free to contact me.
Craig Thompson, ChFC
Asset Solutions Advisory Services, Inc. is a Fee-Only Registered Investment Advisor specializing in helping the needs of retirees, those nearing retirement, and other investors with similar investment goals.
We are an “active” money manager that looks to generate steady long-term returns, while protecting clients from large losses during major market corrections.
Asset Solutions is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.