BEAR PROOF YOUR PORTFOLIO

How to make your portfolio bear market proof!

That is a headline that probably gets more advisors and investors to read a particular article than any other headline. Why- because we all fear seeing the value of our portfolios go down, which is human nature. And the vast majority of us dislike losses a lot more than we like gains.

The good news is there are advisors and funds that portray themselves as using a “tactical strategy”. In the investment world, “tactical strategy” means moving around in anticipation of future events that the manager or advisor foresees in an effort to avoid risks and increase returns. They try to avoid the areas they expect to do poorly, put more money into areas that they anticipate will do well, and generally time the market using their “proprietary” process.

The bad news is that Morningstar, a large database that measures the performance of mutual funds reveals that no tactical mutual fund manager beat the S&P500 over the ten year period ending June 30, 2017. So it is a very attractive idea in theory, but the reality of successfully implementing it is obviously a very different story.

Avoiding bear markets is a tempting endeavor, but the market timing hall of fame is an empty room.

Warren Buffet is considered to be one of our greatest investors, and his company Berkshire Hathaway has returned 20.8% from 1965 through 2016. Did he do that by avoiding bear markets? No- according to Wealth Management.com, Berkshire Hathaway had peak to trough declines of 37% in 1987, 37% from 1989 -1990, 49% from 1998-2000 and 51% from 2007-2009. If he does not try to avoid bear markets, should we?

Recently the investment firm Ritholz Wealth Management looked back from 1950-2016 at every calendar year to identify the largest peak to trough decline of the overall market. It found that the average pullback during a calendar year is -13.5% and in more than half of those years there was a pullback of at least 10%. In spite of that, returns were positive in 79% of those calendar years.

Turns out that the road to riches is a bumpy one, but it has required patience and at times just plain “holding on” in order to benefit.

We don’t “bear proof” our clients’ portfolios, but by not exposing your strategy to any more risk than is necessary to reach your goals, and building a plan that takes bear markets into account, we know that whatever bumps in the road we encounter are unavoidable and anticipated.

Thanks,
Beach

Disclosure: Views expressed in this newsletter are the current opinion of the author, but not necessarily those of Raymond James & Associates and these opinions are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future results. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index.