How to protect your investments from a market downturn

At our investment meeting this week, one of my colleagues shared the news that he had received a call late the night before from a prospective client confirming his decision to hire us to manage his portfolio. While that itself is not news we’re thankful to say, what was interesting was the voice mail message the investor left, saying, “The market seems a bit high so I’m moving my money over to you guys to put to work in your more diversified platform.”

Although we may be biased, we think there is merit in what he says — and we applaud his foresight. Too many investors (even professional ones!) have a tendency to extrapolate current investment trends well into the future. That is, they buy in after markets have been performing well only to sell out of fear when they turn bearish. In other words, they buy high and sell low. Frequently-cited research by DALBAR shows that over the past decade, investors have cost themselves potentially 4% per year in returns by doing the wrong thing at the wrong time.  In this business, one must be vigilant about not letting emotion drive decision making.

Let’s face it, the last few years have been good ones for investors.  The media has been full of stories of the Dow Jones Industrial Average making new highs. Stock markets have been strong throughout the world, and that has people feeling good about their investments. The data shows us that volatility is down, which indicates investor complacency. We haven’t seen a meaningful market correction since 2011. It’s nice when you have the wind in your sails. However, to further that analogy, what will happen when a storm blows in? The pundits are warning of the next market correction. Have you heard of the Swoon in June? What’s next, the Slide in July? What rhymes with August?

As risk managers, we are always concerned about protecting capital. It is interesting that recently we have had more conversations with people, like the above-mentioned investor, who have done well with their investments over the past few years by taking higher risk, and are now looking to protect what they have gained. They are coming to us for a more diversified and conservative approach than is commonly available.

We welcome the opportunity to put our experience and expertise to work for these people, and we hope we can save them some angst and pain if and/or when the “Scourge in September” comes along. Will you be ready?

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