Market and Performance Update

My work schedule has been such lately that I’ve missed writing a couple of newsletters this year. Last month was one such miss. In January I committed to writing a book about retirement for people who are from one to fifteen years away from it. My publisher sent me a twelve-step process for writing and marketing a book. Step one says ‘Write a Book.’ Wow! I just finished that on the last day of July. Only eleven steps left. Anyway, my newsletter was sort of taking a backseat to the book. Hopefully, I’ll have more time now to devote to other projects like this newsletter.

June was very unkind to investors, with the Dow sinking by almost 5%, the S&P down over 8%, the Russell 2000 being down almost 10%, and the NASDAQ being down over 13%. But July gave us some good performance numbers. The Dow was up 6.73%, The S&P was up 9.11%, The Russell 2000 advanced by 10.36% and the NASDAQ forged ahead by 12.35%. Taking June and July together, they all finished about where they started. The Dow ended May at 32,990 and finished July at 32,845. The S&P was 4,132 and 4,130 respectively, the Russell 2000 gained just a little from 1,864 to 1,885. And the NASDAQ gained a good bit over its May finish, 12,081 to 12,391. Overall, June and July seemed to cancel themselves out. All of them, however, are still down for the year. The S&P and Russell 2000 are in correction territory and the NASDAQ is still in a Bear. 

Market Update

Many of our clients know that we manage most of the assets invested with us. We buy extensive research, which comes in each market day. We have established the rules by which we invest in the market and pull out of the market. We adhere strictly to those rules. We change the rules only when a flaw in our current rules is discovered. We discovered such a flaw in our Harmony Conservative Model last year, and a flaw in all four models in mid-2019. Since then, we have been actively managing your assets by these rules. Our process is to follow trends in the market. Because of that, we probably will not beat the market when it is heading straight up. However, our models and the rules we invest by are designed for us not to give much back in a falling market. While we have never claimed that our active management style of investing will absolutely beat the stock market over the long-term, we also know that when the market is falling like a stone, it is in the nature of humans to become frightened and sell out at just the wrong time. Our active management style is designed to keep that from happening. See, our accounts may not advance as much as the S&P 500 during a big Bull run, but when the trend is showing us a long-term negative market, we will change our strategy to take advantage of it. In many cases we will be able to produce a positive return even in the middle of a falling market. We know, through our 40 years of experience, that if we can keep our losses to a minimum, our clients are more likely to stay invested with us, thus giving their assets a good shot at getting the good, long-term growth that’s possible when one keeps their assets invested well.

Many of our clients check their accounts pretty often, so they know how they’re doing this year compared to the market. If you’re not one of them, and you’d like to know, give me a call. We’ll look it up and give you the news. If you like what you hear, tell others. We are accepting new clients, and we love referrals. 

Thank you for being our client and trusting us with your hard-earned life savings. We work hard every day to deserve it.

Nature of Humans – The Herd Mentality

We are creatures of habit, aren’t we? We are also creatures of the ‘herd’ mentality. If we do what everybody else does, we may be wrong, but we won’t be alone. When the 2008 market meltdown happened, people lost 20, 30, 40 percent or more of their hard-earned wealth. Every investor was down. We are currently suffering through another market correction so far in 2022. It may turn into a full bear market, or even a crash, by the end of the year.

I write emails to you to let you know what we we’re doing about it, and how we go about reducing your exposure to the market during these uncertain times. And in turn, I receive calls and thank you emails from many of you for keeping you informed.

I see the fear in you first hand when the markets correct like they are doing now. But by being able to exit the market and sit in the money market fund, we are able to mitigate the risk inherent in a portfolio made up of equities. 

That’s why our company is known as an active manager. We have no problem getting all the way out of the market if our research tells us to. On the other side, we have no problem being 100% invested in the stock market if all our indicators are positive. 

The other way to invest in the market is called passive, or buy and hold. This is where you buy a stock or mutual fund, and just hold on to it, no matter what. During the 13-year bull market just ended, passive investments outperformed active investments because the market spent most of its time going straight up. 

But when the volatility of the market gets heavy, people start to become afraid and they make rash decisions about their investments. Many of them give back a lot of the gains they make in the good years because they sell out at the bottom. They do that because it is in the nature of humans to do what you can to alleviate pain, whether it’s physical or psychological. And seeing tens of thousands of dollars melting out of your portfolio is painful indeed.

Several years ago, when we were in the middle of a strong bull market, I wrote this in my newspaper column.

“When, not if, but when the market turns down hard, and those passive investments start hemorrhaging money, active investments may still maintain all or most of their value. At least that’s what they are designed to do. When this happens, there will be lots of people who will lose twenty to forty percent of their value, just like they did in 2008 and early 2009. Many will swear off the stock market forever, blaming it for taking away their financial security. My profession will also be culpable. The vast majority of us do what our clients do, we project what an investment recently made into the future. While selling our clients passive, and very expensive, investments is legal, it’s also lazy (or incompetent) because nothing is easier than saying to our client, “Well, Mr. Client, the Gronsky Mid-Cap Value fund made 27 percent last year. I’m sure you want some of that, don’t you?” 

I, Noel Swain, believe it is important to closely follow the trends of the market and vacate the sectors that are currently trending lower. It takes time and effort to stay on top of it, but the rewards can be very satisfying. Buying the overall stock market and holding it for thirty years can be a very good idea for intergenerational wealth. But most of us are just trying to invest so we can retire at the normal age and stay retired. Having some downside protection along with the growth potential only the stock market can give you is the great idea behind active management.

Based on the phone calls I have been getting lately, many of our radio show listeners didn’t even know that active management exists (but you do!). They believed if you had an equities portfolio, and the market started going down, you were stuck. I can understand that because the annuity guys on the radio tell you that all the time. They love to push that fear button by saying things like, “the market could crash at any moment. And if it does, your retirement nest egg could disappear like a snowball in July.” 

Fact is, many people do get scared when the market starts to tank. If they get scared enough, they may even sell their portfolio when it is really down, with the justification of they just don’t want to lose any more of it. I get calls from clients that want me to sell their portfolio. This is what I normally say. “I understand that the market is down. While our process is designed to mitigate the risk in your portfolio, there is no guarantee that you won’t have periods in which your account is at a loss. However, if we do get you out of the market now, what will be your criteria for getting back in?” Most folks who vacate the market based on emotion have no idea when they will ‘feel’ like getting back in. In our practice, we know, when we get out of the market what has to happen for us to get back in. It’s not an emotional decision. It’s a decision based on data, and discipline, and rules.

2022 is showing you what we’re made of. We have made about 15 trades this year so far. We will most likely make that many more by the end of the year. The market is showing its weakness. Whether the cause is something political or just the normal market cycle, it doesn’t really matter. It is happening, regardless. The best thing we can do is recognize what is happening and be serious about protecting our assets. That’s what we are doing every day at ProVest. 

We thank you for being our client, of trusting our judgment, and being confident in our management of your portfolio. It means everything to us.