In uncharted territory, like now, you need to think creatively and solve problems within a rationale framework. Performance against a benchmark is interesting, but the ability for an investor to meet their financial and life goals is most important. Though my investment philosophy is firmly grounded in the realm of long term strategic investing, these are special times. For this reason, I have implemented some important risk management processes into my investment strategies.
Regardless of your risk profile, the current coronavirus crisis is causing significant financial pain to all investors. Uncertainty of the depth and length of this crisis has caused financial markets around the world to large losses. Year-to-date through yesterday, the S&P 500 was down -22%, international developed markets were down -29%, and emerging markets were down -25%. U.S. Treasury bonds have been a safe haven, but investment grade corporate bonds have sold off being down -9% due to the potential for increased bond defaults.
It is a foregone conclusion that the economy will show significant weakness in the wake of this crisis. Most of the factors that “tactical asset allocators” use to signal a “risk-off” environment are certainly signaling risk-off; either now or when the statistics are calculated and reported.
For this reason, I have taken most all of our client accounts to a 20% cash and U.S. Treasury position to help smooth the volatility. For now, I have sold the riskiest asset classes including real estate investment trusts, international developed equities and emerging market equities with the expectation that they would suffer the most in a protracted situation. I may do more selling depending upon how the situation evolves. I expect to reinvest the proceeds once the negative factors begin to turn positive.
Be safe!