The last quarter of 2018 has not been a kind one to retirement accounts, due to the market correction we went through. Things are starting to look up since then though.
It’s earnings season, and the quarterly reports from companies whose stocks are listed on exchanges are coming in fast and furious now. A lot of money moves in and out of stocks based upon how these reports measure up to our expectations, and analysts keep a very sharp eye on both these numbers and where they think that a company’s business results are headed.
People who are saving for retirement need not be so diligent as analysts need to be. After all, these analysts do this for a living, just like we work at our other jobs, and when something is your full-time occupation, you are going to be spending a lot more time with it than someone who may only be casually involved or perhaps not involved at all, as is very common with individual savers.
Individual quarterly statements are generally looked at though, and for a great many investors, this may be the only time they really look at their progress. Some do check things more often than that, but do so in a much more passive way than those who are much more engaged in markets would.
There is a distinct lack of any real plan here with the great majority of these investors, meaning that the results may not cause us to take action anyway. Our keeping track of the results ends up being for informational purposes only, giving us the means to crow or to worry depending on these outcomes.
Investors who look upon their 2018 Q4 quarterly statements will no doubt be pretty unimpressed, at least those who have a high proportion of their portfolios exposed to the stock market, as the stock market did take a pretty big haircut last quarter. Declines in the range of 10-15% are typical over this time period, depending on whether you have all your eggs in the stock market basket or have put a good amount of them in things like bonds or cash-like instruments.
When the average market return is 6-7%, and you lose over twice that in a single quarter, this can be disconcerting, and we may indeed want to be managing this to some degree, other than just sitting back and hoping things change.
Using Investment Hedging Sensibly
Many advisors preach that we should hedge our portfolios more with non-stock investments, and this is a time where that strategy yields gains so to speak, if we can call losing less money that. It’s a net gain for sure over just going all-in with stocks and taking the full brunt of downward moves.
This strategy does not just limit losses though, it also limits gains, because if you are lessening your exposure to losses, lowering your risk in other words, you are also limiting your potential gains. In a bull market like we’ve been in for the last 10 years, choosing a path to limit gains will end up being a costly one actually, and when you see the stock market gain 350% over this time, and you only get half of that, or even three quarters of it, you’ve left a lot of money on the table.
It should be clear to us that this is a case of over-managing risk, and that is the big criticism of such a hedging strategy. Markets move up more than they move down, and these moves up can occur over periods of years, as this current one has, and when all this is happening, the cost of the strategy can greatly outweigh the benefits.
This does not mean that we should not pay attention to managing risk with our portfolios, and far from it, and it also does not mean that asset allocation isn’t a good tool to manage it. Like all tools, it has its uses, it has a time and a place, but this doesn’t necessarily mean that it is useful all the time.
When all is well and markets just keep rising, we may wonder whether this hedging strategy is appropriate, and it’s hard to imagine this being wise actually at these times. When you do see the dogs at the door, where a market reversal appears riskier, and especially when one is in the grasp of one of these declines, exposing less of your portfolio to these risks by using some means or another is extremely wise.
The current situation is actually a good time to re-visit this, and while we may have been enjoying the feast that the market has provided for us for the last decade, we couldn’t really be faulted if we are seeking to hedge things more these days. When we see pullbacks, that’s exactly what the big money is doing, and following the big money if you are a much smaller investor with not a lot of knowledge about these things isn’t a bad idea at all generally.
Where We’re Headed is What Really Matters
Another habit of professionals is to not look so much at what has happened, but to instead focus on where we are probably headed. Individuals usually just look at the current results, for instance how much their retirement accounts have declined over a certain period, like this last quarter, and use that to inform and guide them, which is a real mistake.
We have an excellent example of why this does matter when we look at how we finished out 2018 and started in 2019. We might look at our statements and see we’re down 15%, say, and think that the outlook is poor and perhaps question our degree of involvement in the stock market based just upon this.
When we look closely, we see that if we are looking to time things like this, this pullback was already starting to move back to the upside when the quarter ended, and has continued these gains throughout the month of January. The reason why so many people think that it’s difficult to time your investments like this isn’t so much that this is difficult in itself, but when you don’t have much of an idea of what you are doing, it can be difficult indeed.
This does not mean that we should just ignore what is going on either, and the move that we did see last quarter could be more than enough to want us to start reducing our exposure to the stock market, whether that be by moving more of our assets into bonds or cash or any other hedging strategy we may choose.
Those who did so some of this in Q4 did no doubt benefit, in Q4 that is, and when people start talking about the end of the bull and moving more toward bear markets, and the noise here gets particularly loud like it has over this time, then it may be time to consider such strategies.
Things do look fairly good right now though, a month into Q1, and those who did not hedge last quarter are probably still feeling pretty good about things based upon how this is all turning out. This doesn’t mean we should take our eye off the ball though.