Picking Up The Pieces

As the carnage in the equities market unfolded over the last couple of months, many investors couldn’t bear to look at their retirement portfolios, and other long term investments, as the gains based on years of disciplined investing were wiped out. However, as we adjust to our new reality, it’s time to review our investments and take some positive action. 

Disciplined investors construct their portfolios to optimize gains and manage many forms of risk, however idiosyncratic risk related to unforeseen events, such as the economic impact of Covid-19, is extremely difficult to control. So, you’re in good company when you dare to peak at your portfolio and see how the overall value has declined. Now to take some positive steps towards setting yourself up to benefit from future market moves. The enormous stimulus from the Federal Reserve and the search for yield will drive some significant changes so you should be ready to take advantage. 

The global Covid pandemic resulted in an extreme flight to quality trade as investors swapped out of riskier equities and into more safe haven investments like treasuries. This has resulted in the US 10 year treasury yield falling to historically low levels under 80 bps. Also, huge risk parity portfolios will now be significantly overweight in bonds so I would expect a large flow of funds out of bond holdings and into equities. If you have a mix of bond and equity funds in your 401k, you will find that your holdings are now significantly different to your target allocations so it’s worth rebalancing. 

With your 401k rebalanced, it’s time to look at your other investments. If you were fortunate enough to sit on a stockpile of cash during this period, it might be time to start picking some companies and returning to your disciplined investing approach. Again, the extreme market moves may have significantly changed the relative holdings of your existing positions so you could benefit from rebalancing. I like to hold about 40 different names in my equity portfolio, with no exposure to any single name greater than 5% of my overall portfolio. If you have holdings that are larger than your targets, consider reducing these and investing in other companies that will further diversify your portfolio and provide opportunity for gains as markets normalize. 

As the volatility increased while the markets attempted to quantify the economic impact from the pandemic, stocks exhibited extremely high correlation as investors de-risked on the back of bad news and tiptoed back into the equity markets as markets became oversold and snippets of positive news reduced the overall fear factor. However, I believe that dispersion of price action between names is increasing as investors evaluate the longer term impact from the pandemic, after all, stock prices should be based on a longer term outlook for corporate earnings. Here, I would focus on sectors first… at this stage it’s difficult to assess the potential impact on the industries like travel but will consumer staples be as heavily impacted as the recent performance suggests ? The energy sector is also worth thinking about… Covid has reduced global demand for oil and other energy sources plus the Saudis and Russians have been in a standoff but will this result in the longer term impact that the markets have priced in ? Focus on quality names that you expect will perform well over a longer period… you may be buying at a multi-year low, or at least at a much lower level than a couple of months ago. For the more sophisticated investors who are uncertain about the future direction of some of your larger holdings, you could consider selling covered call options to generate some income while the volatility remains elevated. Generally, I think it’s a good exercise to revisit your holdings and focus on fundamentals, as the market gradually normalizes after this extreme period where technical factors have dominated. 

And now, with some positive steps taken towards saving the quality of my retirement, I’ll be checking out the weather forecast and scheduling some golf with my brother, while still following the social distancing guidelines. With my brother’s newfound form, I think we need to renegotiate his handicap to give me a chance to earn back those $18 I’ve lost recently… Life goes on as we extend our sympathies and keep those who have been directly impacted by this dreadful disease in our thoughts.