As I write this on Monday May 11, 2020, the market opened lower this morning but is recovering. In fact the market has recovered approximately 60% of its losses from the sell off bottom. The S&P 500 is down just around 9% YTD. The Nasdaq actually has made a new high since the market downturn became our new reality. The broad small stock market remains down about 20%. iFlip clients are generally up around 9%. What causes these disparities ?
First and foremost, one of the main things we like iFlip users to understand is that all markets and all portfolios are not created equally. Generally we want to invest to mimic the S&P500 because year over year we want the 9.5% after dividend yield the this index has provided over the long run. We can assume, but not safely assume, that in the long run we will achieve this historic result. We cannot safely assume this because the market at any given time can quickly lose 30% very quickly. If this happens close to retirement and the market fails to rebound, a 30% hits to savings can be devastating and damage significantly the 9.5% historical return.
The main thing I learned in my career is to have large exposure to the broad market through vehicles that mimic the market e.g. SPY, IVV, etc. so that the lion’s share of a portfolio tracks the S&P. However, given the volatility of the broad market they must be actively managed to reduce exposure when necessary. In iFlip user cases it’s through algorithms. Even though algorithms and associated AI are not perfect, they manage the risk of the broader market effectively. The other thing I learned is to invest a smaller share of a portfolio in stocks that we can find conviction, i.e. a fundamental reason that they should advance in price. We know these stocks. They, right now, are technology stocks (FAANG – which is used as an acronym for Facebook, Apple, Amazon, Netflix and Google stocks). In the sixties they were the “nifty fifty”. The Nasdaq went up on the year because these stocks have the ability to perform even in the middle of a crisis. These too must be managed but it is fool hearty NOT to have some of these stocks in our portfolio. This explains why the Russell 2000, the broad small stock index e.g. IWM is still down 20%. They cannot perform in the middle of the crisis. For what my opinion is worth it is foolish to own these stocks.
When it comes to our users, they have generally done well through this crisis because the active management piece has performed as expected. It sold and re-bought in a timely fashion and by doing so managed risk and currently is outperforming. It lost some money on the way down and bore some risk when it re-entered in mid-March. It was able to re purchase stocks because it had cash from selling more than 20% above where it got out.
So where do we go from here? The market rebounded because of unprecedented amount of stimulus from both the Fed and Fiscal sides. The risk is to be on the sidelines. Yes, this new reality we must accept but it will evolve and I can’t think in my mind where given this much stimulus, and owning stocks where we have conviction, that the market wont move to new highs and beyond over the coming years. The first test of this will be the elections which will add volatility in the months ahead. A further caveat is a possible change in leadership that doesn’t have the markets health to be the priority as in the present administration. Either way, opinions and views change on the dime, but sound algorithms coupled with AI offer the best way to navigate through all opining and politics.
The Best Health To All,
Kelly Korshak, CTO & The iFlip Team