Chances are you have read a lot recently about the debt ceiling battle in Washington D.C.  Thus, my intention in this post is not to regurgitate the factors and debate points surrounding the issues of the debt ceiling, how the government should raise revenue, and/or how it should reduce spending.  Instead, let’s provide a bit of perspective, then explain what we are doing about it.

Like the Lionel Ritchie song referenced in the title, there is a lot of dancing going on regarding the ceiling, but it’s not the kind of dancing that gets our endorphins pumping.  Rather, it’s pretty depressing.  That is one of many emotions that Americans, investors or otherwise, are grappling with right now.  Other emotions that may have been stirred as we stare down another international embarrassment (even if a temporary fix is agreed to):

·         Fear

·         Panic

·         Frustration

·         Confusion

·         Anger

·         Helplessness

First, understand that as an investor, these are all very natural reactions.  And, you are by no means the only one experiencing them.  Consider one of many reasons we have reached this point, as stated in the Wall Street Journal online on Thursday night, July 28^th, as a vote on the debt ceiling was abruptly postponed:

The debt crisis has arisen because most Republicans and some Democrats are refusing to support a debt-limit increase unless it is linked to sweeping deficit cuts. But they can't agree on the nature or scope of those cuts—and that leaves them in a staring contest, each insisting the other must blink first.

At these moments in history, we like to separate the issues we can control from those we cannot.  Once that is done, we focus solely on what can be controlled, and devote our energy toward doing the best job we can to produce great outcomes.

 

WHAT WE CANNOT CONTROL

So, on our list of things we CANNOT control, let’s start with the decisions, bartering and tactics used by politicians.  There is absolutely nothing we can do about it from our spot in the citizenry, at least not right now. 

We also cannot control how markets will react.  We can analyze, speculate, pontificate, etc.  But we can’t move the markets.  They are much bigger than us and have a life of their own.

Finally, we cannot control the existence of a massive amount of opinions and so-called “advice” circulating around us every day regarding what to do with our money.  It comes at us from so many angles: TV and radio, internet and idle chatter, from family, friends, alleged gurus and strangers. 

 

WHAT WE CAN CONTROL

OK, now to the good news: we CAN control what happens to our hard-earned wealth during this crisis and the other inevitable crises to come.  Here is how we are handling this at our firm:

1.      Have an analysis, thought and reasoning process we have developed over a long time, tested in battle over and over, and believe in to the core.

2.      Approach the markets (the stock market in particular) not as something to latch on to in full, but as a tool to get what we want: growth potential, liquidity, and perhaps some reasonable level of cash flow into our account from dividends.

3.      Above all else, do what is necessary to protect against the “big loss.”  What is the big loss?  The answer depends on who you are.  This is one reason we are so enthusiastic about the next several years in our industry.  We see a significant gap between the number of people that need assistance figuring out what kind of investors they really are, deep down, and the number of them that actually have figured it out.  This is precisely what causes investor emotion, and why for decades both individual and professional investors alike have a documented history of buying high and selling low (you read that correctly!).

4.      Be aware of market indexes and benchmarks, but avoid being obsessed with them.  I have seen this a few times in my career and I see it starting to happen again now: anxiousness over one’s short-term underperformance versus the S&P 500 Index.  I must ask, who died and left the S&P king?!  The S&P 500 Index is an unmanaged index that cannot be invested in directly.  Past performance is not a guarantee of future results.   I see in market cycle after market cycle, the same behavior.  Investors see the “market” doing well for a while and forget that there is a flip side to those glory days of temporarily big returns.  My advice: don’t fall prey to “performance envy.” 

 

HOW DID WE PREPARE FOR THIS, AND WHAT WE ARE DOING NOW?

We think that in their heart of hearts, most investors are risk-averse. They want to make a solid return, but they are far more emotionally influenced by losses, especially big losses.  This is the emotion that rises to the surface during stressful times like this.  After all, we are only about three years removed from the last major financial crisis, and Europe is putting up a good fight with the U.S. in the battle of who can implode first.  If you are thinking “enough already!,” you have a lot of company. 

But are you doing anything about it?  At CWM, LLC, our Registered Investment advisor, here is what we have been doing all year, in anticipation of an eventual day of reckoning for the 30 years of excessive consumer and government spending that is either close at hand or at least getting closer by the day.

1.      Take out a “fire insurance” policy on your portfolio.     We believe in using protective measures.  Our intent is to reduce the impact of any major market decline, which we believe is quite possible in the upcoming months.  A break below the S&P’s 2011 low point could be hazardous, and foreshadow a much bigger decline. 

2.      Keep an uncomfortably high level of cash in our portfolios.   We say “uncomfortably” because as capitalists we want to pursue positive returns, but as realists we have to be ultra-disciplined about not throwing good money after bad, so to speak.  Did this cost us some upside potential when the S&P sat at a 6% gain or more year-to-date, which it has on several occasions this year?  You betcha.  Did we feel like we did the right thing when reality started to creep in, first gradually, and now in full public view on C-SPAN and other networks?  Yes!

3.      Amidst all the gloom and doom, identify where there IS emerging strength and investment attractiveness .  We have found this in two areas:

a.      Investment styles that often move out of step with the broad equity market.    We are currently looking to exploit what we believe is an ongoing state of weakness with the U.S. Dollar on the world’s currency markets, and consolidate our non-equity holdings into what we believe are very low-volatility alternatives. 

b.      Companies with leadership positions, and the cash to stay there.   While the government and consumers are now paying for corroding their balance sheets for many years, we find several very attractive businesses that are positioned to outlast their competition because they don’t need outside capital to grow (they crank out cash flow on their own).  In many cases, they are also willing to divert some of that cash back to their shareholders as dividend income. 

We own several of these currently and we have identified more.  We don’t own some of them because our investment discipline requires that we not overpay for them, and we feel we’d be doing that today.  As that changes, company by company, you can expect to see them enter our portfolios. 

Importantly, as the stocks of these businesses reach a point where our process dictates that we exit, it probably means we are exiting temporarily to sidestep expected weakness in the stock price.  If the business is still attractive to us, we continue to follow it, and again consider it for purchase when it returns to a level at which we want to own it again.

So, we encourage you to employ or inquire about how to improve your odds of keeping more of your capital when those around you are losing a lot of theirs: in other words, “taking some risk out of taking a risk.”  And hey, cheer up.  The NFL season is back on!

 

Rob Isbitts is the Chief Investment Strategist of Carson Wealth Management Group and Chief Investment Officer of CWM, LLC, Carson Wealth’s affiliated Registered Investment Advisor.  With over 25 years of industry experience, Rob oversees investment strategy, asset allocation, security selection, and investment research for CWM, LLC and provides asset allocation and model portfolio research and recommendations. 

 

Investment Advisory Services are offered through CWM, LLC, a Registered Investment Advisor.  The S&P 500 is an unmanaged index that cannot be invested in directly.  Past performance is not a guarantee of future returns.  All financial figures quoted are taken from sources believed to be accurate though their accuracy cannot be guaranteed.  The opinions expressed in this article were of a general and educational purpose only and should not be relied upon as investment or financial advice.   For advice concerning your own unique situation please see your professional advisor.  No investment strategy can assure success or protection of profits as investments are inherently risky and subject to market volatility. 

 

 

(C) Carson Wealth Management Group

www.carsonwealth.com