The greatest friend for the investor in turbulent time is diversification, says Charles Self, Chief Investment Officer at iSectors. Unfortunately, as the market hit new highs in February and in the ensuing bear market, it became apparent that they were tremendously under-diversified. Since equities have performed so well during the previous ten years, investors focused on that asset classes. Many investors also owned some bonds in the portfolio. But given the low yields that were available, they held as few as possible.
The vast majority of investors did not invest in other asset classes such as precious metals that have low correlations to both stocks and bonds. They have reduced losses in portfolios in this bear market. Even within the equity asset classes, U.S. investors are significantly underweighted in emerging markets. Although the sector has lagged in recent years, the countries represented by these companies have the greatest growth prospects in the 2020s and have better valuations than developed country firms.
The rallies after bear markets make up most of the gains over the years. You have the advantage of “convexity” which is a fancy way of saying that the recovery is a much bigger percentage than the loss – for example if the market sells of by 1/3 (33.3%) and then you invest, you make 1/2 (50%) if it returns to its previous high. But you have to be a patient investor who doesn’t take on too much risk because things move around a lot (high volatility).
The best investment opportunities vary across each bear market. For example, in this one it’s good to own big tech, but in the early 2000s bear market it was exactly the opposite. Overall, interest rates will generally drop in the early stages of a bear market so it’s good to own government bonds and by the late stages growth companies will have done very badly so it’s good to buy them rather than value companies.
In building a portfolio in a bear market, investors should patiently add to their long positions rather than worrying about missing it and getting in too early. The best way is to add a little each week and not be fully invested until the market is down more than 30% and if things look really bad even waiting to down 50% to be fully invested.
It is definitely the best time for new investors to join the market, but in the patient way described above. There is a saying that “entry point is everything” which of course is a bit trite because picking the entry point perfectly is what requires a crystal ball.
According to Alan Grujic, CEO of All of Us Financial, right now, in terms of specific stocks, favour digital economy and avoid small and mid-size companies. He believes there will be another sell-off period and that it is better to wait before buying.
5 for right now:
5 for when we start to re-open the economy (if the companies are in ok financial shape at that time):
Investors who need to further diversify their portfolios should consider adding the VanEck Vectors Gold Miners ETF (GDX). This fund owns 50 of the largest gold mining companies globally. These companies tend to operate in areas far from COVID-19. There is ongoing demand for gold by global central banks that should continue in the future. Finally, capital gains taken in these stocks have better tax treatment than those incurred in gold bullion or bullion funds.
According to Ksenia Yudina, Founder and CEO of U-Nest, “one of the safest investments you can make is in a 529 for your kids. You will be taking care of your precious assets in more ways than one.”
Firstly, you are doing the right thing for your kids. By setting up a college savings plan you are helping your kids avoid the scourge of student loans. It’s an investment in their future.”, she continues.
Secondly, 529 plans are long term by nature. Using a solution like UNest you get access to financial advisors that will tailor a program based on your child’s age — that gives you some flexibility and assurance that your dollars will grow. Plus, you get big tax advantages, as long as you use the investment account for educational purposes at an accredited educational establishment.