How’s 2014 Doing So Far?

Bull & Bear Econonomic Trends ConvergeJanuary was a challenging month with the major indexes losing -6% in a two week period after a strong 4th quarter in 2013.  An important part of our risk management strategy includes identifying exit prices for every stock or fund in an account.  When we buy a position, to protect our accounts against a potentially large loss, we determine at what price we will sell if it declines.  Several exit prices were triggered in our accounts in the January decline and we sold increasing our cash position and creating a cushion against further loss.  Had the market continued to decline, this extra cash is very important in protecting accounts.  But after the low on February 3rd, the market began another uptrend.  In early February we invested the cash raised in January in sectors which are strongest on a relative basis.  Some of those include healthcare, railroads and home builders, for example.  As of this writing with five trading days in March behind us, the January losses are recovered and then some.  No one knows what this year will hold for the market. Though many like to predict, we find predicting to be folly.  There are so many things that can happen to change everything, and it is the unexpected that makes the difference.  We are committed to managing risk for our clients because, although the stock market rally appears strong at this point and we are once again fully invested, markets don’t go up forever.

The market has now entered the 6th year of the bull market rally which started on March 9, 2009 when the market bottomed after the financial meltdown of 2008-09.  The ride back to the top has been anything but smooth.  There have been a number of significant declines in this period including a -17% decline in the summer of 2010, a -21% decline in the summer of 2011 and a -12% decline in the summer of 2012.  None has lasted long enough to break this bull market streak, lulling investors into a false sense of security.  As the market goes higher, many have little concern for potential losses.  It appears they have short memories.

Some ask why reduce market exposure as you did in January.  Why not just ride through it and wait for it to rebound?  The answer lies in the history of market cycles.  Markets do go through cycles just like the seasons, and bull cycles are followed by bear cycles.  This bull cycle is being called “mature” because it has lasted 60 months while the norm is closer to 34 to 36 months.  We are overdue for a bear cycle correction.  Markets don’t announce at the beginning of a decline that this is the “big one.”  Investors must have a plan ahead of time for what they will do under certain circumstances.  We call this scenario planning.  We respect our exit prices to protect our clients from the unexpected.

The first thing to remember is the market goes down much faster than it goes up.  The S&P 500 Index, lost -56% of its value in 17 months from October 2007 to March of 2009, but it took 5 ½ years before the market saw those highs again.  Five years ago, most investors were afraid to own stocks and today they are afraid of missing out on the big gains.  Few are talking today about how to protect their stock portfolio from the next big decline.  Investors who vacillate between the fear of loss and the fear of missing gains are destined to repeat the mistakes of the past.  It is not a question of if there will be another big decline it is a question of when.

When everyone you talk to thinks the stock market will keep going higher, you better have a strategy to protect against losses.  If you would like to know more about our money management strategies or would like a second opinion about your portfolio, call us for an appointment.  540-772-4545.

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