Martin Pelletier: Take a step back and try not to let previous results influence your risk behaviour
Traders work on the floor of the New York Stock Exchange. Photo by Michael M. Santiago/Getty Images files Romance is in the air as markets appear to have found their footing after one of the strongest starts to the year in a long time.
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Access articles from across Canada with one account Share your thoughts and join the conversation in the comments Enjoy additional articles per month Get email updates from your favourite authors This time around, it’s the less attractive getting the most attention with roughly US$300 billion in short coverings pushing bearish bets to a neutral position while sending the most unprofitable stocks soaring higher.
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Companies whose earnings missed estimates outperformed the S&P 500 in the five days following the results, according to Bloomberg, while the most shorted stocks outperformed the least shorted by 14 per cent so far in 2023.
Adding to the momentum is the fear of missing out by those who lost a lot of money last year. Retail investors plowed into the market, accounting for 23 per cent of the total volume in late January, which is above the 21 per cent reached during the 2021 meme mania, according to JPMorgan Chase & Co. estimates and cited by Bloomberg.
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But don’t kid yourself, money managers are just as susceptible to this euphoric behaviour, given the average balanced fund lost between 12 and 15 per cent last year, so many of them may not have any choice but to add risk to portfolios to try and recoup these losses.
This applies even more so to those managers overweight in highly volatile sectors such as technology, given the Nasdaq lost 33.5 per cent in 2022, but is up nearly 15 per cent this year.
As a result, you have a situation where portfolio positions are driving the interpretation of the data and resulting outlook, whereas it should be the other way around. The consensus view is that interest rates will fall back down, supporting the riskiest and longest-duration segments of the market.
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During times like these, we think it is important to take a step back and try not to let previous results influence your risk behaviour. Few seem to be asking what will happen if this year’s rally is just another head fake, which is what occurred numerous times in 2022. What happens if inflation sticks around, albeit at a lower level, forcing central bankers to keep rates at current levels or, worse, slightly higher?
Recommended from Editorial Big Tech is back, but be careful about going all in on rate-sensitive sectors How investors can change their approach to tackling challenging market conditions Where investors might want to look if interest rates and inflation persist This is why managing risk alongside return is paramount even in the years following market corrections, because that doesn’t necessarily mean the immediate year after will have a strong recovery. Placing your portfolio on black or red isn’t a strategy; it’s more gambling than anything else.
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Article content We are in the minority that see higher rates for longer than the consensus expects, but we’re also positioned such that we don’t need either a dovish or hawkish scenario to play out in order to make money. We’re just not about dualistic investing, but rather goals-based, risk-managed investing.
Therefore, we’re still into shorter-duration equities and bonds. Our higher cash weighting is getting paid almost five per cent. And we’re really overweight structured notes with high-single-digit, low-double-digit yields and embedded downside barriers of 30 to 40 per cent. We still own energy, a bit of long global value and, yes, even some tech-heavy S&P 500 positions to round it out.
Now, it really helps that we protected the majority of last year’s correction, so these strategies may not be as enticing for those who lost double digits last year. That said, we would still consider a repair strategy, but look for one that doesn’t involve doubling down on what got you in trouble to begin with.
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Article content It helps to remember that finding a balance between taking risk and generating returns, instead of chasing markets, has proven to be the surest way of achieving one’s financial goals and objectives. This may be an old school approach to managing money, but sometimes the old school gets the most Valentines.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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