Preserving Capital

There's been a bit more negative chatter in the markets recently as all of a sudden folks have woken up to the fact that a lot of stocks have been going through corrective phases even while the S&P 500 has held up relatively well.  Readers of this blog will note that we've been a bit more cautious over the past six weeks.  Back on August 5th, in order to reflect what we had been doing in client accounts, we changed or shortest term indicator to NET MARKET NEUTAL {You can go here for a definition of that terminology.}.  We also talked about some of our concerns back on August 28th:

"What is the greatest risk that you see to markets right now?

There are two things as I see it.  There is short term seasonal risk.  Late summer through October has traditionally been a seasonal period of weakness for stocks.  This has the potential to be compounded this year due to the elections in early November.  Apart from that, the biggest risk seems to be an exogenous event likely coming from one of the crisis areas of the world or a natural disaster such as an earthquake.  The hurricane season is shaping up to be rather mild this year so I think a Katrina type disaster is likely off the table.  The problem in managing a portfolio is that an event like this-one that could have a serious impact on equity valuations-is that it could happen tomorrow or it could happen never."  

Given the above, I thought it would be a good time to briefly cover an article I saw yesterday over at "Yahoo Finance" on how to preserve capital during a bear market.  I'm going to list what I think are the main points of the article {In Green & underlined}and then comment where appropriate.

"You don't start planning for a bear market after it occurs."  I want to start out here by saying that based on what we see today, I don't believe we are entering a bear market.  I think we're in some sort of corrective phase right now which is reasonable given the fact that stocks have gone up for over two years now without a 10% correction.  That being said, I acknowledge that I could be wrong.  That's why we have the defensive pages of the playbook handy during times like this.  Investors should always have a plan for investing.  Part of that plan is what to do when things go wrong.  Even doing nothing during a bear or corrective phase can be part of a plan as long as it fits into your investment profile.  Investors with no plan often panic and end up doing the wrong thing at the wrong time.

"The biggest thing is to have a plan and stick with it."  We have the playbook and the game plan.

"You don't need fancy Black Swan Hedges."  The author prefers intermediate term bonds.  We prefer cash for this type of hedge.

"There's no way to avoid risk in the financial markets."  There is no free lunch.  If you have the time go read Howard Marks of Oaktree Capital latest essay on risk.  You can find it here.  

"Understand your ability to and willingness to take risk."

"For investors approaching retirement don't have money tied up in the markets that you will need to use for spending purposes within five years or so."  That period seems a bit long to me, especially in an environment where cash pays nothing.  I do agree that investors of all ages should make sure to have an appropriate financial cushion.

Link:  How to Preserve Capital During a Bear Market. 

Note:  I will be out tomorrow so the next post here will be Thursday and then Monday next week.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.