A Winning Mindset
Winning, whether on the field or as investor, carries with it some important prerequisites and mindsets. We discuss these in more detail while also sharing some relevant current market history to highlight the key points.
Five Things You Should Know
Insights for Investors
“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness…” Charles Dickens, A Tale of Two Cities
Last Friday the world was ending, and investors were on the run only to come racing back to begin the week in historic fashion pushing the S&P up over 5% in just two days (more on this below). And yet, here we are again on a Friday with investors once again panic selling. Simply manic and nonsensical behavior.
You can be manic with the crowed or prepared…the choice is yours.
No one enjoys market volatility, but far from being fatal it can actually be a benefit for the prepared and diversified investors. What traps most people is that they weren’t prepared in terms of either cash flow or positioning/risk tolerance.
Too many people were leveraged and/or chasing returns that simply weren’t sustainable only to get caught “offside.”
For those that are prepared, at worst they simply ride through it and at best use it to reposition and get in an even better spot.
How to L.I.V.E. Through the Storm
Being prepared boils down to being able to confidently answer this one simple question inspired by the L.I.V.E methodology/framework we use to help give client confidence and clarity:
Do you have the LIQUIDITY and INCOME you need today to survive market VOLATILITY in order to get the EXPECTED RETURN you desire over time?
If you are not sure, or don’t fully understand, what the above means, don’t feel bad just give us a call.
You see, “volatility” only becomes “risk” if you have to sell, which of course also keeps you from achieving the returns you hope to see.
An investor can avoid “having to sell” by making sure to appropriately address their liquidity needs, as well as build in a cash flow that can sustain them through bad markets. Perhaps the cash flow comes from your current job, or perhaps it needs to come from the portfolio itself which is why we built the High Income Series.
Our High Income Series derives its 5%+ cash flow from a variety of sources from call-writing, alternatives and tactical fixed income allocations but in the end its about realizing that “capital appreciation” is the byproduct of proper planning and portfolio construction and not a foundational element in and of itself for many situations.
Income is critical for a couple of key reasons: 1) dividends/cash flow from a most asset classes are far less volatility than the underlying asset values themselves, 2) steady cash flow therefore mitigates sequence of returns risk (see this link for reference) because it helps you meet your needs without forced liquidations during periods of market volatility.
As to point #1 above, and the resiliency of income vs. values, consider the S&P 500 itself. As you can see from the chart below, dividends are not just steady but growing. As First Trust noted, “Overall, the companies in the S&P 500 Index are flush with cash, as measured by the S&P 500 Industrials (Old) Cash & Equivalents. This measure excludes Financials, Utilities and Transportation companies. Cash holdings totaled $1.6 trillion (preliminary) on 6/30/22, according to S&P Dow Jones Indices.”
Just like the old story of the tortoise and the hare, most investors will “win” the race by taking the slower but steadier approach to building wealth, but certainly as relates to maintaining their wealth.
Tale of Two “Markets”
After historically grim investors sentiment (north of 60% for just the 5th time ever) culminated in a brutal sell-off in markets last week which took them to deeply oversold and shorted levels (see following three charts respectively) the market preceded to gain over 5% in just the first two days week (yet another history making data point).
As you’ll see from the first chart below, such strong moves don’t happen often but do tend to occur near the bottoms of nasty bear markets.
The good news is such occurrences have historically indicated more strength ahead, albeit not right away. As the next chart shows, the average 12 month return after such a move is over 27% even if the 3-month average is negative. For those of you paying attention to recent commentaries such strong 1-year number may strike you as familiar as we’ve highlighted similar 1-year returns after a) calendar year bear markets, b) sentiment readings of 60%+ bearish investors and c) similar negative breadth readings (see our commentaries from 9/23/22 and 9/30/22).
Such data points all historically resulting in similar 1-year returns is not a coincident as they all have occurred during the same tough market periods.
The takeaway is that while it feels as though such dire times will never end, the reality is that they do, and their endings invariably bring pretty solid returns.
Our hope is this historical context can help lift your spirits, and if you need a little more motivation, please check out the video above.
As always, we are here for you and wish you a wonderful weekend,
Tim and the team at TEN Capital
Data, Just the Data
Data points this week included: