Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
From Global Virus Acceleration to Global Debt Explosion - 1st Apr 20
UK Supermarkets Coronavirus Panic Buying Before Lock Down - Tesco Empty Shelves - 1st Apr 20
Gold From a Failed Breakout to a Failed Breakdown - 1st Apr 20
P FOR PANDEMIC - 1st Apr 20
The Past Stock Market Week Was More Important Than You May Understand - 31st Mar 20
Coronavirus - No, You Do Not Hear the Fat Lady Warming Up - 31st Mar 20
Life, Religions, Business, Globalization & Information Technology In The Post-Corona Pandemics Age - 31st Mar 20
Three Charts Every Stock Market Trader and Investor Must See - 31st Mar 20
Coronavirus Stocks Bear Market Trend Forecast - Video - 31st Mar 20
Coronavirus Dow Stocks Bear Market Into End April 2020 Trend Forecast - 31st Mar 20
Is it better to have a loan or credit card debt when applying for a mortgage? - 31st Mar 20
US and UK Coronavirus Trend Trajectories vs Bear Market and AI Stocks Sector - 30th Mar 20
Are Gold and Silver Mirroring 1999 to 2011 Again? - 30th Mar 20
Stock Market Next Cycle Low 7th April - 30th Mar 20
United States Coronavirus Infections and Deaths Trend Forecasts Into End April 2020 - 29th Mar 20
Some Positives in a Virus Wracked World - 29th Mar 20
Expert Tips to Save on Your Business’s Office Supply Purchases - 29th Mar 20
An Investment in Life - 29th Mar 20
Sheffield Coronavirus Pandemic Infections and Deaths Forecast - 29th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast - Video - 28th Mar 20
The Great Coronavirus Depression - Things Are Going to Change. Here’s What We Should Do - 28th Mar 20
One of the Biggest Stock Market Short Covering Rallies in History May Be Imminent - 28th Mar 20
The Fed, the Coronavirus and Investing - 28th Mar 20
Women’s Fashion Trends in the UK this 2020 - 28th Mar 20
The Last Minsky Financial Snowflake Has Fallen – What Now? - 28th Mar 20
UK Coronavirus Infections and Deaths Projections Trend Forecast Into End April 2020 - 28th Mar 20
DJIA Coronavirus Stock Market Technical Trend Analysis - 27th Mar 20
US and UK Case Fatality Rate Forecast for End April 2020 - 27th Mar 20
US Stock Market Upswing Meets Employment Data - 27th Mar 20
Will the Fed Going Nuclear Help the Economy and Gold? - 27th Mar 20
What you need to know about the impact of inflation - 27th Mar 20
CoronaVirus Herd Immunity, Flattening the Curve and Case Fatality Rate Analysis - 27th Mar 20
NHS Hospitals Before Coronavirus Tsunami Hits (Sheffield), STAY INDOORS FINAL WARNING! - 27th Mar 20
CoronaVirus Curve, Stock Market Crash, and Mortgage Massacre - 27th Mar 20
Finding an Expert Car Accident Lawyer - 27th Mar 20
We Are Facing a Depression, Not a Recession - 26th Mar 20
US Housing Real Estate Market Concern - 26th Mar 20
Covid-19 Pandemic Affecting Bitcoin - 26th Mar 20
Italy Coronavirus Case Fataility Rate and Infections Trend Analysis - 26th Mar 20
Why Is Online Gambling Becoming More Popular? - 26th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock Markets CRASH! - 26th Mar 20
CoronaVirus Herd Immunity and Flattening the Curve - 25th Mar 20
Coronavirus Lesson #1 for Investors: Beware Predictions of Stock Market Bottoms - 25th Mar 20
CoronaVirus Stock Market Trend Implications - 25th Mar 20
Pandemonium in Precious Metals Market as Fear Gives Way to Command Economy - 25th Mar 20
Pandemics and Gold - 25th Mar 20
UK Coronavirus Hotspots - Cities with Highest Risks of Getting Infected - 25th Mar 20
WARNING US Coronavirus Infections and Deaths Going Ballistic! - 24th Mar 20
Coronavirus Crisis - Weeks Where Decades Happen - 24th Mar 20
Industry Trends: Online Casinos & Online Slots Game Market Analysis - 24th Mar 20
Five Amazingly High-Tech Products Just on the Market that You Should Check Out - 24th Mar 20
UK Coronavirus WARNING - Infections Trend Trajectory Worse than Italy - 24th Mar 20
Rick Rule: 'A Different Phrase for Stocks Bear Market Is Sale' - 24th Mar 20
Stock Market Minor Cycle Bounce - 24th Mar 20
Gold’s century - While stocks dominated headlines, gold quietly performed - 24th Mar 20
Big Tech Is Now On The Offensive Against The Coronavirus - 24th Mar 20
Socialism at Its Finest after Fed’s Bazooka Fails - 24th Mar 20
Dark Pools of Capital Profiting from Coronavirus Stock and Financial Markets CRASH! - 23rd Mar 20
Will Trump’s Free Cash Help the Economy and Gold Market? - 23rd Mar 20
Coronavirus Clarifies Priorities - 23rd Mar 20
Could the Coronavirus Cause the Next ‘Arab Spring’? - 23rd Mar 20
Concerned About The US Real Estate Market? Us Too! - 23rd Mar 20
Gold Stocks Peak Bleak? - 22nd Mar 20
UK Supermarkets Coronavirus Panic Buying, Empty Tesco Shelves, Stock Piling, Hoarding Preppers - 22nd Mar 20
US Coronavirus Infections and Deaths Going Ballistic as Government Start to Ramp Up Testing - 21st Mar 20
Your Investment Portfolio for the Next Decade—Fix It with the “Anti-Stock” - 21st Mar 20
CORONA HOAX: This Is Almost Completely Contrived and Here’s Proof - 21st Mar 20
Gold-Silver Ratio Tops 100; Silver Headed For Sub-$10 - 21st Mar 20
Coronavirus - Don’t Ask, Don’t Test - 21st Mar 20
Napag and Napag Trading Best Petroleum & Crude Oil Company - 21st Mar 20
UK Coronavirus Infections Trend Trajectory Worse than Italy - Government PANICs! Sterling Crashes! - 20th Mar 20
UK Critical Care Nurse Cries at Empty SuperMarket Shelves, Coronavirus Panic Buying Stockpiling - 20th Mar 20
Coronavirus Is Not an Emergency. It’s a War - 20th Mar 20
Why You Should Invest in the $5 Gold Coin - 20th Mar 20
Four Key Stock Market Questions To This Coronavirus Crisis Everyone is Asking - 20th Mar 20
Gold to Silver Ratio’s Breakout – Like a Hot Knife Through Butter - 20th Mar 20
The Coronavirus Contraction - Only Cooperation Can Defeat Impending Global Crisis - 20th Mar 20
Is This What Peak Market Fear Looks Like? - 20th Mar 20
Alessandro De Dorides - Business Consultant - 20th Mar 20
Why a Second Depression is Possible but Not Likely - 20th Mar 20

Market Oracle FREE Newsletter

Coronavirus-bear-market-2020-analysis

Stock Market Investors Stay the Course! Which One?

Stock-Markets / Stock Markets 2016 Jan 13, 2016 - 01:03 PM GMT

By: Axel_Merk

Stock-Markets

Each time I hear someone suggest investors should ‘stay the course’ as markets tank, I fear such well-intentioned advice fails to adequately capture the predicament investors are in. Worse, the ‘stay the course’ mantra may set many investors up for failure.


Frog in boiling water cartoon

So what's wrong with sticking to one's holdings when they tank? I would be the first to agree to encourage investors to stick to a plan when the markets are in turmoil, but only if its investors have been on a plan all along. Let's assume for a moment that an investor has done his or her homework, possibly even sat down with a financial planner or given his or her money to someone to manage. We are all good then, right? I'm afraid that may not yet cut it.

Investors developing a financial plan tend to look at parameters that consider the person's life situation expressed in factors such as financial goals, income, expenses, and risk tolerance. They tend to choose a mix of assets to pursue their goal.

If you are a stay-the-course investor (retail or professional) and say that, of course, anyone taking investments seriously considers volatility and correlation, let me ask you this: what processes do you have in place to manage volatility and correlation in your portfolio?

If you think you have a good process in place, what have you been doing with your portfolio in recent years to manage risk and ensure you are properly diversified? I am asking because in my conversations with hundreds of investors - professional and retail alike - the common thread was that investors enjoyed the ride. Now, if your investment philosophy is to "enjoy the ride," then good for you. But if you think to have a process of managing risk and diversification, you may have noticed at least two phenomena:

  • Volatility in both equities and bonds was, for quite some time, below its historic norm;
  • Asset prices were increasingly directionally correlated, i.e. investors may not get the sort of diversification that they expect.

It's during good times that it's time to get ready for the rougher times. No, this doesn't mean a buy-and-hold investor needs to become a tactical asset allocator. But it means that periodically, investors should revisit their goals to stress-test their portfolios.

Sure, if you have your money managed professionally, you'll have your periodic visit with your financial planner or investment adviser. But are you holding them accountable, quizzing them whether the strategy they pursue for you will work when the tide shifts? Or will you be one of those swimming naked when the tide goes out?

I think the most straightforward way to stay the course in a bull market is to take chips off the table, i.e., reduce assets that have outperformed (to rebalance a portfolio or to raise cash). I'm not insisting anyone has that strategy - in fact, if someone says they'll go all in, no matter what, I don't have a problem with that. Relevant is that you need to have a plan you are comfortable with, then have healthy cross-checks as you go along, consciously amending the plan if you deem prudent as the parameters that went into your plan change.

Before you wonder why such common sense would get me riled up, it's because reality looks very different from theory. During the bull market that I believe has lasted until last summer, many investors did not take chips off the table, but 'bought the dips' instead. Retail and professional investors alike looked to be increasingly afraid of missing out on rallies; more so, what could possibly go wrong when asset prices move higher and higher on the backdrop of low volatility? In such a "low risk" environment, isn't it prudent to load up on stocks, especially when fixed income doesn't yield anything? So maybe you were more active and purchased income producing investments, be that dividend paying stocks or high yield bonds. In my assessment, the Federal Reserve (Fed) and central banks encouraged risk taking. I'm not telling you anything you don't know. However, only you (and hopefully your financial adviser, if you have one) know your financial plan. Did you stay the course, or did you follow the call of the Sirens? And since I believe we've had a high proportion of investors following the call of the Sirens, i.e. not take the good times with a grain of salt when it came to their portfolios, it is hypocritical at best to only remember to stay the course once asset prices plunge.

In my opinion, staying the course is especially important when asset prices rise. Take 2008: the prudent investor would have taken chips off the table in the run-up to the financial crisis. Then, when asset prices plunged they would have had ammunition to buy when prices were low. In practice, however, investors had not taken chips off the table, with some losing 50% or more of their nest egg. Then, as we were at the bottom, pundits called for investors to double down. Sure, such portfolios might have bounced back, but it may be difficult to ask someone who has lost half their net worth to increase their risk profile; I allege such a person cannot afford to risk that much. If your financial plan is to play the lottery when times get rough, I won't criticize you. But if you had a plan and didn't stick to it when asset prices were rising, I'm not sympathetic to any outsized losses endured in a downturn.

So let's look at 2016. U.S. equity markets are down more than 10% from their peak. That's not much given how far we've come, but the volatility of late has gotten investors' attention. Any investment model asks you about your "risk tolerance," an abstract concept until one has experienced downside risk. Consider the following:

  • If you have a "60/40" portfolio (60% equities, 40% bonds), have you periodically rebalanced your portfolio? If not, odds are that the risky (equity) portion of your portfolio has grown to over 60%; odds are then, too, that the elevated volatility exceeds the risk profile you are comfortable with. In my opinion anyone suggesting you stay the course with an overweight in equities is irresponsible.
  • If you have periodically rebalanced your portfolio, but you are surprised that "risk" means exactly the type of thing that has happened to your portfolio of late, you need to have a serious chat about what risk you are comfortable with. Because: while the current volatility may be a tad above the historic norm, the abnormal times were the years of extraordinarily volatility until last summer. While I can't give specific investment advice, if you can't sleep at night because of the volatility in your investment portfolio, you may be over-invested in risky assets. In my opinion anyone suggesting you stay the course is irresponsible.
  • If you have rebalanced your portfolio and believe you can stomach the volatility we have had of late, check what portions of your portfolio went up the first week in January to see if you are as diversified as you would like to be. Did your overall portfolio perform in a way that was consistent with what you think a diversified portfolio should have? If not, then in my opinion anyone suggesting you stay the course is irresponsible.

For full disclosure: I made an argument for a looming bear market last August, ahead of the market turmoil. As such, I personally believe most investors would be better off preparing for what's ahead by doing far more than simply rebalancing. However, there are lots of potentially successful investment strategies, and I wouldn't want to impose my own on everyone. What in my view all successful investment strategies have in common is that they are based on a plan, but a plan that overarches the entire investment horizon, not merely one to be pulled out of a hat when times are rough.

To continue this discussion, please register for our upcoming Webinar on Thursday, January 21. If you haven't already done so, follow me at twitter.com/AxelMerk and ensure you sign up to receive Merk Insights , our free newsletter. If you believe this analysis might be of value to your friends, please share it with them.

Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Rick Reece is a Financial Analyst at Merk Investments and a member of the portfolio management

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules