It’s rare to find someone who likes to be early to a party. It’s a unique person indeed who enjoys what most consider at best, an awkward situation with a host who silently wishes they had a few extra minutes to prepare. At the other end of the etiquette spectrum are those who don’t know when to leave. Most make their exit while still having fun, but there are always a few who overstay their welcome, fueled by the adrenaline of rich food and heavy handed cocktails. Sound familiar?
Like most celebrations, the “market party” has an awkward beginning with a handful of guests making idle chatter while anxiously waiting for others to arrive. Somewhere along the way, the early arrivers are joined by the validators. The party then takes its legitimate place as a festive, burgeoning event where everyone seems happy and revels in good cheer. Last but not least, the latecomers arrive. Whether due to procrastination, an overbooked dance card or just plain forgetfulness, every party has them. Whichever group the investor may belong to there is a strong chance that some from each will overstay their welcome.
In my last missive on the market, I elaborated on VUCA – Volatility, Uncertainty, Complexity and Ambiguity. VUCA and party arrivals can be a bad combination and inevitably seem tied to one another. Some market party participants (investors) would like to avoid or time VUCA so it works to their advantage and maximizes profits. Savvy participants in the capitalist pig-pickin’ know this is not possible. When it comes to investing, the anxiety of trying to foresee VUCA or the equally daunting task of deciding when to arrive or depart (the market party) can be reduced if the investor and his/her advisor;
1) uses a risk appropriate allocation strategy;
2) shows a willingness to remain invested and;
3) chooses investments that work well together but not necessarily in the same way.
While off a bit in the past few days, the Dow Jones Industrial Average (DJIA) recently pushed through 21,000 and did so in the style of a Usain Bolt sprint. This rapid rise increased portfolio values but also created some concern over sustainability. Fortunately, as allocators, active trimming (to targets) of select equity positions has occurred over the past several months. Proceeds have been reinvested in either bonds, hybrids or held in cash. Elaborating further on point 3) in the previous paragraph, steps were recently taken to add a new hybrid investment. This holding, Credit Suisse Managed Futures Strategy Fund (Ticker CSAAX), historically shows a tendency of working against the grain. If history repeats and equity markets continue to rise, CSAAX will likely see modest declines. If markets fall, the position should see modest gains. With a position size of approximately 2% relative to the entire portfolio, movement in this holding should not significantly impact total performance. But if past behavior is an accurate indicator, CSAAX will serve as an effective counterweight in declining equity markets.
As disciplined investors know, despite its ups and downs, the market party is never really over. However, when a majority of the equity revelry is over and the economic thunderclouds bring stormy weather, CSAAX should complement the other hybrid investments and along with bonds, help dampen declines for the party goers that always remain in style regardless of the current trend.