Quality Over Quantity; Active Over Passive

Throughout most of 2019, the most frequent question I heard from clients and colleagues was, “How long can this market continue to rise?” To which the answer was always, “Who knows?” What everyone knew was that markets don’t go up forever, but they also don’t go down forever. Now I get questions such as, “Do we buy now?” or “Have we hit bottom?” I find it re-assuring that people feel confident enough that they are willing to buy after two plus dreadful weeks in the equity markets, but I think that everyone needs to take a deep breath and look at this from a 30,000 foot level.

First, the stock market (as measured by the S&P 500) peaked at approximately 3,380 in mid-February and at the time of this writing is at approximately 2,750 which means it is down by roughly 18% in a month. It feels to me like we will cross through the notable 20% decline which constitutes a bear market. So, if you have cash, when should you buy? As I noted in a memo to clients a couple of weeks ago, I began to raise cash in the accounts that I manage with discretion. I do not pretend to have the proverbial crystal ball, but I do believe that raising cash is a prudent action given these circumstances. But that is only part of the equation. You should compile a list of securities (stocks/ETF/Mutual Funds, etc.) that you would love to own but haven’t had a good entry point. Chances are, you will get your chance to buy at a nice price during this downturn. My advice is that you focus on quality names. Don’t fall into the so-called “value trap”, which is when you see a dividend yield and/or a price to earning multiple (P/E ratio) that looks SOOO attractive that you can’t pass it up. Often, these companies may cut their dividend or will report such poor earnings on their next earnings release that the attractive dividend and/or P/E ratio won’t hold up.

Second, for many years now there has been a strong inclination toward passive investments. The common wisdom has been that owning an ETF (Exchange Traded Fund) or mutual fund that simply tracks an equity index such as the S&P 500 is the best way to invest in stocks. For several years, that strategy has paid off. I do not believe it will be the best way to invest right now. Coming out of the Great Recession, stocks were extremely cheap on a relative and absolute basis and all had lots of room to run before they became fairly valued. Further, the world’s central banks were pumping so much liquidity into the financial system that the cash had to go somewhere and stocks were one of the prime beneficiaries. I believe that now you need to be selective. Simply owning the index exposes you to many companies that are probably overvalued and therefore subject to increased risk.

Lastly, whatever your risk profile, it is time to revisit your asset allocation. If you own a meaningful amount of bonds in your portfolio, they have buoyed this decline assuming they are high quality bonds and not so-called “junk bonds”. If you are retired or are close to retirement, this is especially important for you. In late 2000, I met a man that worked for Lucent Technologies and had his nest egg in Lucent stock. The market had already begun to drop, and Lucent was not spared from this decline. He was adamant that it would recover back to its previous high levels and he promised to reduce his position when it did. As you may have figured, it never did. The moral - don’t fall in love with any stock or other security. Please do not hesitate to reach out if you’d like to chat about your portfolio.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Prior to making any investment decision, please consult with your financial advisor about your individual situation. Any opinions are those of the author, and not necessarily those of Raymond James.

This article was written by Gus Vega, Certified Financial Planner, Total View Advisors and Branch Manager with RJFS. He can be reached at 786.315.4870, 9155 S. Dadeland Blvd. # 1014, Miami, FL 33156. Total View Advisors is not a registered broker dealer and is independent of Raymond James Financial Services, Inc. Securities offered through Raymond James Financial Services, Inc., member FINRA / SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.