Handling Market Turbulence
When market turbulence hits, are you emotionally prepared or equipped to deal with it? Many investors, even those who are professionals, are often victims of their own emotions or that of their clients. A big part of investing is not just about skill but having the necessary intestinal fortitude to stick with a strategy that has been working but suddenly fails miserably.
Over the last 20 years there have been some challenges in the market that likely rattled even the most seasoned investors. For example, year-end 2002 returns would have been exceptionally challenging for any investor on the heels of negative year-over-year returns experienced in 2000 and 2001 which saw S&P 500 returns of -9.10 and -11.89 percent, respectively. Those negative returns were then followed by a calendar year return of -22.10 percent in 2002. Investing in the S&P 500 and remaining fully invested over that 3-year period would have resulted in a painful loss of nearly 38 percent of your initial investment. Even those investors with an eye on the long term would still have been shaken by consecutive losses during that 3-year stretch. The good news is that those who had invested over the long term would have still earned at least 8.5 percent annually over the 30 year-period ending in 2002. It turns out that the worst annual return over any 30-year period is just under 8.5% for an investment in the S&P 500 dating back to 1926. So, other than doing your homework regarding market history, the question is what else can be done to limit or tolerate your downside risk in the equity portion of your portfolio?
When markets take a turn for the worse, it is not only the year-over-year declines that have to be stomached but the daily, weekly, and monthly roller coaster rides. Strategies that can bring some relief in terms of their ability to generate alpha during tough times are a necessity. If we look at the 2008 fiscal crisis, the S&P 500 had experienced price declines of up to nearly 50 percent in November of that year. By year end 2008 price declines were near 39 percent. Worse, going into 2009, prices continued to tumble through March of 2009 when prices hit bottom at -25 percent in the first week. By year end, prices had appreciated and were up 23 percent for 2009. At Investoristics, our strategy is focused on quality, value, and financial strength as a hedge against significant downside risk. During 2008, our quarterly returns, were, -3.21, 8.08, -2.21, and -9.0 percent with a total return for the year of -6.91 percent versus the S&P 500 which returned -37 percent. Through the end of March 2009, our strategy was up over 10 percent versus the S&P 500 which had declined to nearly 12 percent for the same period. By year end 2009, our strategy had soared to over 100 percent, posting no negative returns during any quarter.
Quality, value, financial strength, risk management, and the proper rebalance cycle are the keys to dampening volatility. Our long-only strategy employed at Investoristics successfully implements these tactics to manage market volatility. Also, limiting the number of stocks in our portfolio is a major contributing factor to our strategy’s ability to stay clear of significant market declines in challenging markets. Currently, our strategy is up nearly 16 percent to date compared to all other indices which are down significantly. Beating the markets every single year is impossible. However, winning more than 70% of the time versus the S&P 500 with lower risk while returning over 20 percent annually is significantly better and comes with a lot less stress than investing in indices or other competing strategies. Visit us at our website to find out more about whether our approach is right for you or your organization.
