QUEST Magazine: Money Matters, March 2012

Investing During Volatile Times

By: Thorne Perkin

Many investors feel battered having endured another turbulent year of financial markets. Economic concerns, political turmoil, and even Japan’s natural disaster shook investor confidence which contributed to severe market volatility.

Positive fundamentals including stronger corporate earnings and revenues and a host of record-high company profits went largely ignored. A general nervousness among investors kept heaps of cash on the sidelines searching for clarity and direction. These are unsettling times.

We’ve observed a pattern with retail investors lacking (or ignoring) professional advice. They consistently yank their money out of the market, and then pile it in back at precisely the wrong time!

A quick study of the last 15 years suggests that levels of uninvested cash were at all-time highs in 2002 and 2008, causing investors to miss participating in the powerful bull markets that followed those years. Equally punishing, invested equity levels were at their highest and uninvested cash at its lowest, towards the close of 1999 and the close of 2007, before the painful bear markets.

Paradoxically, the stock market appears the rare store where people race for the exit at the sight of discounted prices—when everything’s on sale. Moreover, it seems popular for the retail investor to run into the store looking to purchase as prices approach their highs.

Popular media doesn’t help, blasting headlines and highlighting runs in the market with sensationalist drama. While staying the course and maintaining a long-term vision can be difficult to do when markets get tested, history has shown that steadfast investors heap rewards.

Conservatively managed portfolios should demonstrate diversification across asset classes that display low correlations to one another. Allocations of high-quality, dividend-paying stocks and investment-grade fixed income are sound core investments for a portfolio.

Additionally, an assembly of well-researched alternative strategies with low or no historical correlation to equity market swings can mute portfolio volatility and bolster returns. A few examples include: non-directional credit, real assets (i.e., gold, oil, or farmland), global macro strategies, and niche private equity.

Markets trend cyclically and pulling out can psychologically feel safe. However, selling after a downdraft crystallizes a loss and invariably leads to the investor missing the early returns of a forthcoming bounce. Indeed missing just a few stout days of a directional market swing can dramatically affect one’s long-term performance.

Like the professional traders who thrive on volatility, it makes consummate sense to look for relative bargains in tough environments. Embrace an element of contrarianism in your investment philosophy; the vast majority of the world’s great fortunes were not built in sunny times!

The portfolio construction process should be adaptive and flexible to client objectives and market conditions, which constantly evolve. Communication should be proactive, offering timely insights and perspective. Make sure the advise you are given is neutral and not self-serving—intuition remains a powerful guide.

As we look ahead, we maintain our conservative posture, bracing for turbulence and looking for opportunities.

Thursday, March 1, 2012