How to Handle the Current Falling Market
Wealthlander Active Investment Specialist
Some investors have asked us how to handle a falling market as many of their investments are losing a lot of money. Here is a summary list of our suggestions about what can be done to stop the unnecessary pain, and adapt portfolios to the new environment.
1. Recognise the Game has Changed
Inflation hurts the poor and the middle class who make up the majority of US voters. A significant majority of US voters don't own much in the way of anything that benefits from price increases and haven't benefitted meaningfully from historic asset price inflation. Hence a heavily politicised FED may be forced politically to prioritise fighting inflation ahead of boosting investment markets. They do this by reducing stimulus and raising interest rates. Unfortunately for investors, fighting inflation through reducing balance sheet expansion and raising interest rates only works by crushing demand first. This means economic demand and demand for equities need to get crushed as a necessary precondition to central banks effectively fighting inflation, if they attempt to do so. We might think of this as a policy mistake or a central bank choice, as other measures of fighting inflation (such as addressing supply and labour force issues) are better than anything central banks can do - but it is what it is and comes attendant potentially dramatic effects on mainstream markets.
Effectively, one needs to acknowledge the investment cycle, as we highlighted in our article in early January "Four Ways to Massively Improve Performance in 2022:
By recognising that the game has changed, investors can pivot their portfolio approach from what has worked in a bull market driven by disinflation and interest rates moving to 0, to what works better in a bear market caused by inflation, higher interest rates and reduced stimulus and demand (as massive stimulus packages are withdrawn and inflation bites into real wages growth).
The first thing that astute investors can and are doing is reduce the risk of losing money by selling or reducing assets that don't work outside a bull market, and which are at risk of building larger losses. Importantly, it is not losing small amounts but losing large losses in bear markets that destroy investors' long term geometric returns. By way of illustration of this, if you lose 33% you need a massive 50% gain to get back to even; lose 50% and you need 100% gain just to stay still. Furthermore, the journey of the investor is far from pleasant when you are in large losing territory much of the time. Far better not to lose the 33% or 50% in the first place as there is no good cure, but only prevention.
2. Take Advantage of Volatility
The assets which are better suited to rising inflation and interest rates include numerous alternatives. These alternatives include skill dependent rather than market dependent managers, market neutral and long short funds, volatility funds, insurance strategies, some CTAs, commodities such as oil and gold, and small subsets of the equity and property market such as shorter duration equities including resources, farmland and water. You probably don't own much of these currently and hence aren't protecting capital from losses as well as you could be in early 2022. The asset classes don't have the marketing and media budgets of the mainstream approaches so you probably don't know as much about them.
Importantly, these assets are less likely to lose large amounts over an inflationary period compared with the financial assets mentioned previously. Not losing much in tough periods is the name of the game for long term returns and compounding, as well as the more risk averse. By potentially making money or not losing as much, the assets and strategies mentioned are far better suited to protecting capital and enabling long term compounding of your wealth, and particularly so compared with financial assets which are being meaningfully devalued. Furthermore, they offer a way of crystallising and cashing in strong equity and property gains of the last few years permanently, while still offering growth potential in the future.
3. Take Advantage of Volatility
4. Emphasize Better Value Niche Assets
There is much you can do not to be a deer in the headlights. Inflationary periods haven't been seen for a long time and most investors need to learn how to adapt to this different environment while it lasts. The ostrich approach with a portfolio suited to an entirely different economic regime doesn't work well when inflation is here. If you're losing large money, it's probably because your portfolio is poorly diversified and extrapolating history that is no longer with us, rather than being adapted to the times. It is far more prudent in current circumstances to adapt to the new investment environment, and buy a broader mix of assets that provide diversification and resilience. This includes a wide range of alternatives, managers that can take advantage of volatility, and better value niche assets. True diversification is the only free lunch in town right now and there is a delicious smorgasbord on offer to choose from. Venison and ostrich is missing from the menu.
Funds operated by this manager:
DISCLAIMER: This Article is for informational purposes only. It does not constitute investment or financial advice nor an offer to acquire a financial product. Before acting on any information contained in this Article, each person should obtain independent taxation, financial and legal advice relating to this information and consider it carefully before making any decision or recommendation. To the extent this Article does contain advice, in preparing any such advice in this Article, we have not taken into account any particular person's objectives, financial situation or needs. Furthermore, you may not rely on this message as advice unless subsequently confirmed by letter signed by an authorised representative of WealthLander Pty Ltd (WealthLander). You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision. WealthLander makes no representation or warranty as to whether the information is accurate, complete or up-to-date. To the extent permitted by law, we accept no responsibility for any misstatements or omissions, negligent or otherwise, and do not guarantee the integrity of the Article (or any attachments). All opinions and views expressed constitute judgment as of the date of writing and may change at any time without notice and without obligation. WealthLander Pty Ltd is a Corporate Authorised Representative (CAR Number 001285158) of Boutique Capital Pty Ltd ACN 621 697 621 AFSL No.508011.