Navigating Market Risks: Diversified Portfolios and Opportunities

First of all, for anyone that was impacted by Hurricane Helen, or that is in the path of Milton, we are praying for you. If there is anything we can do to help, please let us know. A radio listener recently asked, “if stocks are in a bubble” why would I want to be in the stock market at all?” This is a very reasonable question. After all, there are many things to theoretically be fearful of from politics to wars, to inflation, to government debt, etc. There are a few key considerations in answering this question that I will outline.

Firstly, it is impossible to consistently time the market. In each of my 21 years in the industry, someone has predicted a bear market. One can’t simply go in and out of the market on a whim and invest successfully. This is why building a diversified and dynamically managed portfolio is so important. We want to prepare for risk at the inception of our investment journey, not waiting until risk actually occurs, leading to panic and bad decision making. TTCM portfolios have taken advantage of the highest interest rates in 20 years to buy various bonds and build bond ladders. We’ve taken advantage of the collapse in commercial real estate to acquire growing REITs with 6-8% dividend yields and 25-75% upside potential. We utilize the covered calls and cash-secured puts to generate income and reduce risk. This dynamic approach gives us the confidence and security to weather the inevitable storms, whenever they do indeed show up. Some people think investing in SPY or the S&P 500 is a safe investment. It totally depends on your time horizon and risk tolerance. If you have 50 years, no problem. If you are planning to retire in 5 years, being 100% long stocks in a bubble, seems extremely risky indeed.

Secondly, the stock market is made out of a variety of different industries, sectors, and of course securities. There are often sectors that are out of favor due to some short-term issue, creating opportunities for the enterprising investor looking to acquire stocks at discounts to intrinsic value. For instance, in 2000, the tech-focused Nasdaq fell by 39%, while the Wilshire 5000 Large Cap Value Index gained 17%. From peak to trough the Nasdaq dropped by 80% when the Tech Bubble busted, but value investing had many years of just exceptional performance and growth up until 2008. Currently, we are in a golden era for growth investing. These things ebb and flow, but over the long-term value investing has been the best performing strategy. I think that it is highly likely our best relative performance will come in the next bear market.

Last Friday’s surprisingly strong jobs report has caused interest rates to jump higher, with the 10-year yielding over 4% again. I’d take that jobs report with a grain of salt as it included an increase of 785,000 government jobs. Retail and manufacturing look particularly weak. I think this increase in yields might open some opportunities to get another swing at some of those attractive REITs and/or bonds for those with cash on the sidelines.