On Monday, we saw wild volatility rip through the markets…
And nothing was spared. The S&P 500 closed down 1.2% while the Dow fell 1.9%. Meanwhile, gold dropped 2%… and bitcoin fell 3.7%.
Across the board, nearly every asset class was bleeding red.
But at PBRG, we have a robust risk management strategy in place to guard against extreme moves in the market. If you follow it, it’ll protect your portfolio – over the long term – from wild swings like we’re seeing now.
Today, I’ll go over our strategy… but first, let me tell you what’s rattling the markets.
The Market’s Latest Addictions
After rallying as much as 61% off its March lows… the broad market has retreated 9% since the start of September.
Of course, a resurgence of coronavirus cases in Europe is behind some of the current sell-off. Investors fear a second wave of the pandemic could lead to a new round of global lockdowns.
But Daily editor Teeka Tiwari says much of the current weakness is due to government policy. That’s because the market has gotten addicted to two things: low interest rates and government spending.
Teeka says low rates and a surge in government stimulus have boosted equity prices since the outbreak. But while the Federal Reserve announced it will continue low interest rates for the foreseeable future… the stimulus part of the equation is uncertain.
Last week, the Federal Reserve said it will keep interest rates very low for an extended period of time… That really wasn’t news to the market; it knew rates would stay low… And that’s why the market had such a muted response to the Fed’s announcement.
Now, low interest rates are very supportive of higher equity prices. But government stimulus probably has more to do with the rally we saw off the bottom than anything else. The government put trillions of dollars directly into the hands of consumers. And consumers did what they’re great at. They spent, right? And this surge of capital just went directly into the U.S. economy and has really cushioned the economic blow of the coronavirus.
So the question here now is – at least in terms of the direction of the market – can the U.S. economy continue moving forward without another shot in the arm from the federal government? My gut is saying probably not.
According to Teeka, we’ll likely see another round of stimulus pass Congress. But with both sides trying to one-up the other, it might not happen until next year. And that uncertainty is rattling the markets.
So what can you do in the meantime?
We’re Prepared No Matter Who Wins
At PBRG, we remain bullish on both the stock and crypto markets.
As we’ve written about before, the crypto market has several catalysts that will drive it higher. And as for stocks, they’ll climb over the long term as the Fed is forced to continue pumping stimulus into the economy.
We know that’s a difficult position to take when stocks and cryptos are in free fall. But the key to being a smart investor is to look at the big picture… and to prepare your portfolio to weather any short-term volatility.
At our flagship Palm Beach Letter advisory, we’re prepared for anything the market throws our way.
You see, we use a highly diversified asset allocation model and risk management to protect and grow our portfolio.
Various studies show that over 90% of a portfolio’s long-term returns are driven by asset allocation.
Unlike the 60/40 mix of stocks and bonds recommended by Wall Street, we diversify into eight asset classes: equities, fixed income, real estate, private markets, cryptos, precious metals, collectibles, and cash.
Since our newsletter’s inception on April 13, 2011, through September 18, 2020, our recommendations have averaged annual returns of 114.7%. For comparison, the S&P 500 has annualized returns of 12.6% over the same period.
And not only does our broadly diversified portfolio hand you better returns… it also results in lower risk and better protection for your money.
For example, from February 19 to March 23, the Russell 3000 dropped 35%. (It represents about 98% of the U.S. stock market.) Yet our PBL portfolio was down only 28% over the same time frame.
And this doesn’t account for our alternative recommendations. We have several plays outside the stock market. If we factored them in, we’d only be down by about half as much as the index.
Now, the key to making asset allocation work is risk management. Always use sensible position-sizing and stop losses to protect your downside, where appropriate.
When it comes to position-sizing, Teeka’s simple rule of thumb is this: If an investment hits its stop, your maximum loss should be no more than 2–5% of your portfolio’s value.
So even if a second wave of the coronavirus pandemic trips up this most recent rally… as long as you diversify your portfolio and stick to your risk-management guidelines, you’ll be set up to profit when it restarts.
Managing Editor, Palm Beach Daily
P.S. Although bitcoin is down 3.7% today… Teeka is still bullish. In fact, he believes crypto is one of the best ways to diversify your portfolio.
Not only is it a hedge against broad market volatility, its underlying blockchain technology has explosive upside. You can learn more right here…