An all-weather strategy keeps you diversified and helps to reduce drawdowns during a correction.
The following is a letter to investors I wrote with my colleagues at Robertson Wealth Management.
- The stock market
correction is the fastest in history.
- This is precisely
why it’s important to be proactive and make portfolio changes before the storm
- Robertson Wealth
was prepared for this and has been transitioning clients to an All-Weather
approach for months.
It’s not every day you get to
experience a historic moment… even if it’s a moment you’d rather not
It took the S&P 500 only six
trading days to fall into correction territory last month, which smashed all
previous records. (A decline of 10% or more from the highs is the technical
definition of a stock market correction.)
On February 19, the S&P 500 was
sitting at all-time highs. Sure, there was a little volatility about something
called a “coronavirus” coming out of China. That has roiled the market in the
final days of January. But it was assumed to be under control.
Then the news broke that coronavirus
had spread to Europe… and it started. Stocks fell slightly on February 20.
Then, the market dropped a full 1% on Friday February 21.
And then it got nasty.
The following Monday, the S&P 500
dropped by 3.35% and then fell by another 3.03% the next day. Two days later,
it dropped by 4.2%.
It didn’t get much better in March. As
if coronavirus wasn’t enough to deal with, OPEC and Russia’s deal to restrict
crude oil supply broke down, leading Saudi Arabia to all but declare economic
war on Russia by flooding the market with new supply.
Following the news, the price of West
Texas intermediate crude dropped by over 24% on Monday after being down more
than 30% at various points throughout the day. The volatility in the oil market
spilled over into the stock market, culminating in the massive 7.60% drop in
the S&P 500 on Monday March 9 – one of the worst single-day moves in
It’s amazing how quickly things can
change, going from new highs to official correction territory in six days.
This is why it’s critical to be
prepared before a crash hits.
Six months ago, we didn’t know that
the coronavirus would wreak havoc on the economy, and we didn’t know that we’d
be looking at another crude oil price war. But we did know that the stock market was looking extended and that stock
prices were very high by historical standards, and we wanted to get ahead of
any coming volatility.
For these reasons, we made the
decision to transition most of our portfolios to an all-weather strategy. Over
the past several months, we have been gradually transitioning most portfolios
to a version of the all-weather strategy that best fits their risk profile.
In an all-weather approach, the portfolio is divided among different asset classes that tend to move independently, such stocks, bonds, real estate and commodities (including gold). When the portfolios get out of balance – such as during a stock market rout – the portfolios are rebalanced, selling off appreciated assets and reinvesting in the assets that have seen declines.
Over the past few weeks, we’ve made
some notable changes. To start, we took profits in some of our longer-term
bonds and reinvested the proceeds in shorter-term U.S. government T-bills. We’ve
also been loading up the portfolios with high-quality blue-chip stocks. We
wanted to own names with strong underlying businesses that would be less likely
to take extreme damage and more likely to recover quickly from any setbacks.
We don’t know when this correction
runs its course. It could be over already, or it could still have much further
to fall. This remains to be seen.
But we were prepared for this
possibility, and we’re ready for whatever comes next.
If you’d like for us to take a look at your portfolio, please contact our office.