Why We Went to Cash – Market Indicators
This article was hard for me to write this month. It almost seems trivial to write about financial matters when we are worried about our families staying safe and our businesses remaining open. When COVID-19 is over medically, we know we will have to assess the damage done financially. I do not take any of this lightly.
I think there are important questions that investors should be asking right now. I wanted to share what our firm did for our clients and why it may be appropriate for you.
We went to cash. Yep. You read that right. We sold all our equity positions in the market. I know your saying “but that goes against everything my advisor is telling me to do”. Yes, we know. If you have been following my blogs, you may recall that we use a math-based program to help us determine how we should be invested. Our Investment Committee is comprised of five firms from across the nation which utilizes the same math-based program, and it has been around for over 30 years. The first question we answer is, should we be in the market or be in cash to preserve principal? Since May 2009, stocks have been the best place to be. All that began to change three weeks ago.
We track six indicators that help determine the overall strength of the stock market. When a majority are positive, we remain in the market. If 4 or more go negative, it is a sign that there are significant technical and fundamental underlying deficiencies in the market. The indicators are not affected by short-term volatility.
Initially, we observed minimal changes as the volatility was related to fear sell off and not underlying issues. But, as companies, industries, states and entire countries shut down, those indicators were changing rapidly. On March 12th, three indicators went negative, then another two on March 17th, meaning that five of our six indicators were negative. Our Investment Committee made the important decision to move all positions to either a government guaranteed money market or a stable value fund. These indicators also went negative in 2000 and 2008. The point is we have a stop loss in place that seeks to stop any further losses until conditions improve. Government stimulus packages will probably provide a temporary market uptick, but will have little impact on the underlying fundamentals and our indicators. In a market decline, think of a person walking down the steps with a yo-yo. The yo-yo goes up and down as the person is walking down the steps but the overall trajectory is still downward.
We also have a buy discipline. As our indicators begin to turn positive again, we will tactically transition by adding specific asset classes and sectors as appropriate. There will be a significant investment opportunity when that happens.
Our decision was not emotional but based on a very methodical process. These are the questions you need to ask. What is your sell discipline? When was the last time it was executed? How effective was it? Your buy discipline is just as important. If you do go to cash to preserve your principal and do not know when to enter back in the market, you may miss one of the most opportunistic times in history. If you are not encouraged by the answers, it may be time for a second opinion.
This month’s topic is definitely heavier than what I normally post, but given our current circumstances I felt it was necessary. If you would like further information on our investment methodology, I am happy to send you over a webinar that was recorded for all our clients. It gives an overview of the data that we used to help our decision-making process. We are willing to share it with you .
In closing, I would like to reiterate our hope for you and your family to remain healthy. I will be praying for all the small businesses in our community who are undoubtedly feeling the strain of social distancing policies. The United States will survive and when we come back, we will be stronger than before. We are here to help support our friends and neighbors however we can in the coming days and weeks. We are in this….together.
Prior to her career in the financial services industry, Ashley earned her Bachelor of Science in Nursing from Cedarville University.
Ashley decided to make a career change from her ten years within the healthcare industry as a pediatric emergency room nurse to retirement and 401K investment planning. She joined Victory Fiduciary Consulting in 2008 after obtaining her Series 65 professional financial license and went on to earn her AIF (Accredited Investment Fiduciary) professional designation from the Center for Fiduciary Studies.