The Blueprint


Is it Time to Buy or Sell?

Sep 2020

Market performance has been very strong since the initial decline brought on by the pandemic, with the S&P 5001 up over 50% since the market’s bottom. While the market has shown great strength, the health of the economy overall is still in question. Unfortunately, this disparity presents investors with conflicting signals on how to manage their portfolios.
Rather than look for information to support whether it is the time to buy or the time to sell, we suggest that investors instead explore what can be done to manage risk overall, and be prepared for a variety of outcomes.

 

Many Investors Do the Wrong Thing at the Wrong Time

History reflects that many investors are more interested in buying insurance after the damage has already taken place. It is hard to blame them. When things are going well, as they are in the markets today, many investors believe that taking on a less volatile approach to investing does not make much sense. The challenge, however, is that it usually takes a significant drop in the stock market before investors are able to digest the amount of risk they may be taking in their portfolios.

Most investors tend to believe their investment strategy is built for the long term, and utilize a “Buy and Hold” investment approach. The statistics, however, do not support this strategy, as emotion tends to overwhelm investors when markets experience significant downturns. In fact, in the first half of 2020, mutual funds saw major outflows in excess of $300 Billion. The peak month of these outflows came almost at the low of the market this year in March, just prior to the market’s significant rebound.


Source: Morningstar Direct Asset Flows Data for Mutual Funds and ETFs as of March 31, 2020. Excludes money market flows.

The chart above highlights the 5 worst months of fund outflows since 1993. This serves to reinforce how market participants tend to react emotionally and redeem when the market has a large drawdown. Once this has happened the question then becomes, when do you get back into the markets? Many investors do not have a systematic and repeatable investment strategy in place to answer this question and guide them through these extremely volatile markets.

In today’s market, even some consistent bulls have been issuing cautious overtones:

“We have a bizarre situation where some companies are doing very well but a lot of other companies are getting crushed.2

– Jim Cramer, CNBC’s “Mad Money”

 

“It has been disconcerting to see that five stocks account for 25% of the market cap of the S&P 500.3

– Ed Yardeni, President of Yardeni Research

 

“The equity market does seem to be a little bit ahead of my view of the future earnings performance of businesses.”4

– David Solomon, CEO of Goldman Sachs

 

Market performance has been strong in the wake of the initial decline brought on by the pandemic, and we hope this recovery continues. However, the swell of caution being expressed is not unwarranted. As we recently outlined, there is great uncertainty across many important factors that affect the markets; federal stimulus, consumer confidence, unemployment, as well as future corporate earnings. If the market maintains momentum, investor’s will want to continue to capture growth, however, these economic conditions could present risks to the ability to maintain those gains. These uncertainties further emphasize the need for a risk management approach.

Our Focus

At Blue Square, we are focused on risk management and reducing the amount of volatility in our clients’ portfolios. Using our proprietary technology and rules-based approach to investing, our decisions are not swayed by predictions or emotions.

Our investment strategy aims to position portfolios defensively during significant market declines. By systematically raising cash during these periods and then investing it when markets are more accommodating, we aim to create a less volatile investment experience, and ultimately deliver better risk-adjusted returns over full market cycles.

Although we cannot control negative events in the markets, we aim to prepare for them. Should you have any questions or would like to discuss our strategy and capabilities in more detail, please do not hesitate to reach out and we would be glad to help.


1) Source: Morningstar, S&P 500 TR 3/23/2020 – 10/15/2020
2) Source: CNBC, There are a lot more losing than winning stocks in the S&P 500, Jim Cramer says, 10/20/2020
3) Source: MarketWatch, A Shocking, Spectacular and Disorderly Market Crash Looms, Investor Warns, 09/08/2020
4) Source: Markets Insider, Goldman CEO David Solomon thinks Wall Street’s rally in recent months is overblown and stocks are ‘a little bit ahead’ of where they should be

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Blue Square Wealth is a SEC-Registered Investment Adviser. A copy of the Firm’s Current Disclosure Brochure can be found on the SEC’s IAPD site or may be requested at any time by contacting us. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.

All investment strategies have the potential for profit or loss; changes in investment strategies, contributions or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. Past performance is not indicative of future returns.

Significant risk may accompany investments in stocks, bonds or other asset classes over short periods of time. Investment return and principal value will fluctuate with changes in market conditions. Your investment may be worth more or less than your original cost. Past performance is not indicative of future results.

This blog is a publication of Blue Square Wealth. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of subjects discussed. All expressions of opinion reflect judgment of author as of date of publication and are subject to change. Information contained herein does not involve rendering of investment advice. A professional adviser should be consulted before implementing any of strategies presented. Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell securities mentioned herein. Different types of investments involve varying degrees of risk. Economic factors, market conditions, and investment strategies will affect performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark. This document may contain forward-looking statements relating to objectives, opportunities, and future performance of U.S. markets generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “should,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to economic conditions, changing levels of competition in industries and markets, changes in interest rates, and other economic, governmental, regulatory and other factors affecting a portfolio’s operations that could cause results to differ materially from projected results. Such statements are forward-looking in nature and involve known and unknown risks, uncertainties and factors, actual results may differ materially from those reflected in forward-looking statements. Investors cautioned not to place undue reliance on forward-looking statements / examples. None of Blue Square Wealth or any affiliates, principals nor any other individual / entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances.

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