Why Limiting Losses Is Key To Long-term Investment Success

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 7, 2020

IN THIS ISSUE:

1. Overview – The Key to Long-term Investment Success

2. You Can’t Beat the Market, So Just “Buy-and-Hold”

3. Key to Success: Invest Like an Institution, Limit Losses

4. Alpha Advantage Strategy Shines in Coronavirus Crisis

Overview – The Key to Long-term Investment Success

As you know, the news has been hyper-focused on the coronavirus for the last five weeks. My own writing over the same period has also been dominated by coronavirus-related topics. The question is, though, how does one avoid focusing on the coronavirus when it is affecting all aspects of our lives: our health, the economy, jobs, travel, spending habits, the markets, etc., etc.?

But rather than continuing to focus on the coronavirus, today I want to zero-in on an investment topic that is very important to understand at a time like this – when the economy is in a recession and tens of millions of Americans are losing their jobs or being laid off, and when stocks are in a rare but severe bear market.

Many investors are bailing out of the stock market these days, fearing that the worst may not be over, and they may be correct. No one knows what’s going to happen next. But what I want to emphasize today is the fact that bailing out of the market after steep declines is rarely the wise thing to do. And further, that limiting losses in the steep downturns is, in fact, the secret to beating the market and enjoying investment success over the long-term. Let’s get to it.

You Can’t Beat the Market, So Just “Buy-and-Hold”

There is an old adage in the investment world that “You can’t beat the market.” The standard advice then is: Just buy a portfolio of stocks or index funds and hold on through thick and thin – better known as a “buy-and-hold” strategy. For tens of millions of investors, that’s exactly what they do – even though it inevitably means experiencing serious losses in bear markets.

Buy? Sell? Hold?

I have never been a big fan of buy-and-hold because many investors simply don’t have the confidence and patience to ride out the big downswings in the markets. Many get scared during serious downturns and often bail out at the worst possible time. Then, they either never get back in, or if they do, it’s usually not until the market has moved significantly higher.

The Dalbar Studies and others have consistently shown over the last 40+ years that most investors significantly underperform the market averages over time for this very reason: They adopt buy-and-hold but can’t take the big downturns and end-up buying and selling at the wrong times. Many are now contemplating bailing out again, especially if the stock market makes a new low just ahead. It is precisely times like these which challenge the realities of a buy-and-hold strategy.

When I first wrote about the Dalbar Studies in the mid-1990s, when most of our clients were invested in our commodity funds, I assumed they were not having these problems in their other traditional investment accounts.

Boy, was I wrong! We were immediately flooded with phone calls and letters from virtually all of my clients who essentially said: No, no, no – the Dalbar Studies are ME; I consistently underperform the market for the very same reasons they cite. You could have blown me over with a feather! I had no idea.

So, I wrote in my next newsletter that we could identify successful Investment Advisors who could manage my clients’ money professionally and take the decision-making out of their hands. The response was almost unanimous: DO IT ASAP, PLEASE! I took it very seriously.

We ramped up Halbert Wealth Management almost immediately and became a Registered Investment Advisor (RIA) with the Securities and Exchange Commission (SEC). We then began our nationwide search for professional money managers who had consistently beaten the market averages to manage my clients’ investments.

And that’s been our main business ever since. Over the years, we’ve found professional money managers who have delivered consistent returns with less downside risk than the market averages. In the spirit of full disclosure, we have also had to terminate our relationships with several formerly successful managers whose strategies stopped performing. And there have been times like the current market plunge (and in 2008) when even the best managers lost money.

It is for those reasons and others that in the last several years, we’ve purposely broadened our search to find successful strategies beyond just stocks and bonds. We now have managers and funds we recommend that specialize in other areas such as real estate lending, creative insurance strategies and other investments that are not correlated to stocks or bonds.

Today, we can diversify our clients as never before. And several of the strategies we now offer you are not likely to hear of anywhere else. But enough of that – let me get on to my main point today.

Key to Success: Invest Like an Institution, Limit Losses

I wrote the introduction above to underscore the fact that I believe most investors are best served by having professional Advisors manage their investments. As noted above, there are some very successful RIAs, some mediocre ones and some you wouldn’t invest a dime with. For purposes of this discussion, I’m going to assume you can find a reasonably good professional Advisor on your own (and even better ones if you let us help you).

There are plenty of professional Advisors that can match or come close to matching the market on the upside, assuming you can find them. But the difference between a reasonably good Advisor and an exceptional one is: The best professional Advisors tend to lose LESS than the market during downward corrections and bear markets. It’s as simple as that.

Break even table

The math is simple, as shown in the accompanying chart: If you lose less in the market downturns, you spend less time making that loss back, and your account goes to new highs more quickly. Many investors don’t think about it that way, but losing less in the downturns is the key to long-term success in the markets.

And one more thing: In the event your Advisor does take you out of the market during a downturn, the good ones are much more likely to get you back in the market when the trend turns higher again than you would on your own.

My point today is that your goal should be to invest like an institution: with a long-term time horizon, a focus on limiting losses during down periods and diversification among non-correlated strategies.

Also, keep in mind that there will be occasional unprecedented events, like the current crisis, that no one will be able to foresee in advance. To counter such events, it is critical to diversify among various asset classes in an effort to insure that not all of your portfolio loses money at the same time.

With the wide variety of investment strategies we have today, we can help you do that. We have several strategies that either made money during the latest stock market rout (as I will discuss below) or lost very little.

As I have written often over the years, the studies consistently show that individual investors tend to underperform the market averages by a significant margin. While many professional Advisors also underperform the market, there are some really good ones out there. There are successful strategies available today that didn’t exist 5-10 years ago.

The question is: How do you find them? And that’s where we come in.

The bottom line is, unless you are perfectly satisfied with your own investment performance, I highly recommend you look at some of the professional Advisors and non-correlated strategies we offer for at least a portion of your portfolio.

You can do this by going to www.halbertwealth.com or better yet by calling us at 800-348-3601 and speak to one of our non-commissioned Investment Consultants. We’re glad to help even if you don’t invest with us.

Alpha Advantage Strategy Shines in Coronavirus Crisis

Over the last year, I have repeatedly emphasized that my readers seriously consider our Alpha Advantage Strategy for two primary reasons. As I have written often this year, I have been worried that this aging bull market in stocks might be derailed. And for that reason, I emphasized Alpha Advantage because it can “short” the market with the potential to make money when the stock market falls.

The Alpha Advantage Strategy features multiple professional money management strategies in a single account. Each strategy has the ability to invest long or short or be in cash depending on market conditions. As a result, Alpha has the potential to do well in rising or falling markets. That’s exactly how we designed it.

So far this year, some of the strategies in Alpha Advantage did in fact go short and took advantage of this historic drop in the stock market. As a result, Alpha Advantage has been able to make a sizable gain this year as the markets have plunged.

The good news is, it’s not too late to invest in Alpha Advantage since it has the potential to profit in a bull market or a bear market. Take a look at the FACT SHEET for more details. As always, past performance is no guarantee of future results.

Wishing you strength and good health,

Gary D. Halbert

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