Calamity has struck in the form of a global pandemic that has spread into all facets of life. Financial markets have not been immune to infection. In the 24 trading days from February 19 to March 23, the widely watched S&P 500 benchmark required its own ventilator during a sickening 34% plunge. In dollars that means your
$100K in stocks dropped to $67K in a matter of weeks. Since the bottom, that benchmark has recovered somewhat, but remains in the ICU.
The question we pose is this: how can investors get out of the way before losing a third of their wealth and also participate in price recovery? A tactical manager may be in possession of the vaccine. Here are three reasons we believe using tactical management may be an antidote for this volatile environment. Tactical strategies seek to manage losses, participate in gains, and create better returns with less risk than passive approaches.
What is Tactical Management?
But first, what exactly is tactical investment management? In our view, it means responding to the information that the market is saying and doing so in a disciplined and rules-based way. The tactical approach embraces a dual mandate of limiting losses and participating in gains. In contrast, passive investing imparts a “set it and forget it” strategy taking a very long view and riding the market roller coaster ups and downs.
If recent market volatility is making you sick, here are three reasons to use a tactical style of investing.
Why Tactical? Reason #1: Seeks to Manage Losses
First, tactical management applies a rules-based approach that seeks to avoid losses and preserve wealth. A strict, unemotional sell discipline draws a line in the sand to determine when to sell, and therefore, preserve wealth.
Here is an example. The chart on page two shows the chart of a high yield corporate bond ETF from the approximately 14 months from the start of 2019 until the realization of a sell on February 25, based on our proprietary rules. The investment generated about a 7% gain for the period.