The Secular Bull run the stock market experienced from 1982
to 2000 solidified a few assumptions that are still being administered to
portfolios today as we continue to navigate the Secular Bear we are in the
midst of! First, since the market
essentially went straight up during the 82-00 period, many still hold hope that
it will start doing that again.
Second, and along the same line, the buy and hold methodology that was
solidified during a period when the S&P 500 was returning on average of 12%
per year is still being widely practiced in many portfolios. We certainly do not dismiss buy and
hold strategies as a useless way to invest but it is important to understand
that they don't work in all market conditions. The last Secular Bear environment similar to what we are
experiencing today occurred from 1966 to 1982.
During that period of time the stock markets began and ended at
approximately the same level. That
meant zero return for investors that simply bought and held. Fast-forward to today and the S&P
500 has returned over the past 10 years a whopping -21%. Although this seems like dire times in the markets, there is money to be made! Within the grand trends there are shorter, typically 2-5 year, cycles
called "Cyclical Cycles" that occur. The key to producing return within this
environment, which many strategies ignore, is the ability to side-step the market during the bear phases and invest during the bull phases of the "Cyclical Cycles". This is what our strategies are designed to accomplish! Riding out the bear market dips only works when the
grander market trend is in an upward direction, not flat to downward.
At Volt, our investment management solutions are grounded in
our philosophical belief that the markets cycle through these "Secular" bull
and bear market phases. Studying
the historical cycles since the turn of the century led us to two critical
components that we believe are the keys to success when managing
portfolios. They are; protect
capital when market risk is high and deploy capital when risks are low. Sounds simple in theory. This is how we do it:
-Quantitative Modeling
- A "Quant model" is a program that examines a myriad of inputs and eliminates
human emotion from the decision making process. Our program examines the nine sectors of the S&P 500 (Industrials,
Utilities, Financials, Tech, Consumer Discretionary, Energy, Health Care,
Materials, Consumer Staples).
-Use of ETF's
(Exchange Traded Funds) - We use sector ETF's as the investment vehicles to
administer the strategy. A benefit
of using ETF's is that they are extremely liquid which allows us a quick entry
or exit to a sector. They also provide
exposure to all the stocks that are included within the sectors, eliminating
many risks involved in owning individual stocks outright.
-How the Model works
- The model seeks to identify the probability of loss in each sector. It arrives at this determination by
examining historic volatility of each sector against current volatility, the
rate of change of volatility and historical price movements of each of the sector
ETF's.
Rebalancing
Frequency
-Portfolios are re-evaluated monthly or weekly
depending upon each client's objective.
Sector ETFs are traded using a binary model - either IN
or OUT of the portfolio
-Sectors that
are forecasted for positive return are left in and sectors forecasted to lose
money are removed entirely.
When 6 or more sectors are removed it signals a Bear
Market
-When this happens our clients
accounts begin to build a cash position.
-3 sectors IN= 25% cash; 2 sectors IN= 50% cash; 1 sector
IN= 75% cash
-Accounts can go to 100% cash
equivalents if all 9 sectors are eliminated
-Summary - Our
model seeks outperformance without the use of leverage, shorting or
derivatives. Once again, it is
designed to protect capital when risk is high and deploy capital when risks are
low. This combination is the
equation to achieving significant outperformance.
Obtaining superior portfolio performance during a sideways
market starts with limiting the amount the portfolio decreases when the market
goes south. As you have heard us
say many times, "if a portfolio goes down 50%, it needs to achieve a 100%
increase in value to get back to where it was before the decrease." One of the
biggest benefits to our strategy is a defined "safety" value when market
conditions deteriorate. We
understand how the power of compounding is critical to capital growth over time
and we apply that concept to all of our client's portfolios. If you would like to explore how our
strategies can help protect and grow your money, please reach out to us to
learn more.
