Surviving Financial Hurricanes 2.0

by: Chris Wang

The investment professionals at Runnymede Capital Management coined the term “Financial Hurricanes” in an article entitled “Surviving Financial Hurricanes” published in the spring 1996 edition of Financial Consultant magazine. In the article, we urged the industry to research financial market disturbances that would likely increase in severity and frequency negatively impacting the portfolios of both individuals and institutions. Sidestepping even a minor portion of a financial hurricane can benefit clients’ financial and emotional health.

With the growth of 401(k) plans over the last 20 years, individuals have become increasingly responsible for managing their own assets. Unfortunately, there is no one to “sound the alarm” indicating when to cut back their equity position. In fact, the industry and the majority of its brokers, financial planners and investment advisors profess that their investment style is to remain fully invested at all times. Their supporting evidence is explained in terms of modern portfolio theory, diversification, and long-term investing. These concepts and theories are great on paper; but in the real world, investors have a limited time horizon and limited savings.

When a financial hurricane is approaching, theories are meaningless and investors should take protective measures much like boarding up your house and heading for shelter in a real hurricane. Perhaps the industry feels that it’s bad business to be the bearer of bad news. After all, no travel literature ever advertises the possibility of hurricanes in the Caribbean even though hurricanes come many times every year.

Since 1996, we have had two of the worst bear markets which we would classify as Category 5 financial hurricanes where the stock market declined more than 40%. Over the past 100 years, there were nineteen major bear markets with over 20% declines in the Dow Jones Industrial Average.

The tables above illustrate how harmful financial hurricanes can be. In fact, “staying the course” in the ten year period from February 1999 to February 2009 has resulted in negative returns so as the saying goes, “Timing is everything.” It is important to remember that capital loss of a major magnitude from bear markets can bring worries, sleepless nights and emotional stress in addition to capital destruction.

As students and forecasters of financial hurricanes, we at Runnymede care about clients’ financial and emotional well-being. In turn, we strive to protect client assets as well as their peace of mind. Runnymede practices the philosophy, “To win is not to lose.” We want our clients to sleep well as we are making every effort to control risk by investing in America’s best managed companies with best balance sheets and best prospects. Even more importantly, we are vigilantly watching the horizon for storm clouds and are willing to position client portfolios defensively in times of hurricanes.

Avoiding the full impact of financial hurricanes makes sense; just like avoiding the impact of real hurricanes makes sense. There will always be a few who, rather than head for safety, will remain defiant in the face of the storm, but it’s difficult to find a good reason to stay unless you are a pension fund whose time horizon is truly long term. Raising some cash in the face of a financial hurricane can preserve both assets and emotional well-being.