Bear-Market Fire Drill: Asset Allocation Daily

by: SA For FAs


Daniel Amerman discusses the various implication of the loss of “shock absorption” implied by yield-curve compression.

Jeff Miller: One way to judge someone's claims is to review what they were saying and doing right before the market sell-off.

Thought For The Day: Without a full acquaintance with life, we cannot cope with its challenges.

Yield-Curve Implications

“The Fed can stop increasing interest rates. Or the yield curve can invert and go negative. Or the markets can begin a likely wilder ride than what has been seen since before the Great Recession, as bond investors, stock investors, international investors, and real estate investors (as well as homeowners), all experience the full force of what happens when fast rising long term rates hit markets that have collectively forgotten about the possibility that such a thing can happen.” (Daniel Amerman)

Market Pundits

“Hindsight always seems 20/20, but one way to judge someone's claims is to review what they were saying and doing right before the market sell-off. Alternatively, you might proactively set up an investment and trading strategy to meet your individual needs, so when the market does sell off--you'll be prepared and ready. And of course, beware of pundits bringing post-sell-off explanations--they're often just pretending to understand the market.” (Jeff Miller)

Exploiting The Pullback

“Many companies with capable management teams, low debt levels and wide competitive advantages declined along with the broader market. Factor-based trading vehicles may have no choice but to rebalance away from such stocks. While these sell-offs can be painful in the short term, long-term investors focused on fundamentals can and should take advantage of these opportunities.” (Janus Henderson Investors)

Emerging Markets

“We aim to look beyond the "noise" of negative news headlines and instead focus on the underlying fundamentals of the EM asset class. We find a disconnect between the negative sentiment permeating the market and positive EM equity fundamentals, including rising cash flows, improving capital allocation discipline, corporate deleveraging, healthy earnings and discounted valuations.” (Franklin Templeton Investments)

Thought For The Day

The Dow’s 831-point swoon on Wednesday and 540-point drop on Thursday could quickly fade if Friday morning’s snapback is sustained (or picks up on Monday). That’s human nature. There’s a lot that people will forgive and forget once the pleasantness of making money has returned. But forgetfulness would be a wasted opportunity. School fire drills are not meant to be events we move on from, but rather preparation for disasters that make a lasting impression since disasters, though rare, are to be expected.

So let’s start this drill by picturing how you would feel if this week’s down days are repeated today, then each day of next week, then each day of the following week and so on for months, for a year or more (with occasional days of modest gains smattered amidst the downtrend). Those who can remember 2007 through 2009 know what I’m talking about. You begin to think the market will never rise again.

Everybody experiences setbacks, but not all are equal in their ability to cope with tragedy, disappointment and frustration. That is why we must have this “discussion” – it accustoms people to the idea that there can be a prolonged period of falling markets. Without a full acquaintance with life, we cannot cope with its challenges.

So before memories of this week’s sharp correction recede, investors who have not yet done so should develop an extensive, detailed and comprehensive plan to survive a real market crisis – each in his own way, according to his needs and circumstances. That could include a sufficiently large allocation to cash or investments that pay out a regular income, and which enable an investor to not sweat losses on his equity portfolio and even to calmly accumulate more shares. For those who have never sustained large losses, know that if you were traumatized by loss, you’d likely do things very differently in the future to avoid a repetition of the experience.


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