Can you make money in a flat market? When we first heard rumblings of Greece’ potential European Union exit or needing yet another bailout in February of 2015, we adopted a more conservative strategy with your investments. Over the ensuing months, we sold some investments near the highs of the market’s peak on May 19, when the Dow Jones Industrial Average hit 18,312.
On February 11, 2016 the stock market bottomed at 15,660.
The advance since then has been strong. As that advance continued, some investors holding cash began to feel frustrated. Yet for two years there was no evidence of stock revenue growth, even though the market began going up again.
When the stock market goes up, investors rightly want to know why they aren’t going up along with it.
The Evidence To Invest Again
By mid-summer 2016, we were on the cusp of a total economic recession. But then things changed. Instead of a recession, October 21 (q4), Factset was reporting evidence of change that happened in the third quarter. We had revenue and earnings growth again. With this revenue growth, we can have more confidence in potential stock price growth. This is the evidence we needed to begin investing again.
Over time, people shoot me market returns from one point or another and ask “Why are we not getting this return?” The measurements used vary from the beginning of a year, to a market’s bottom to anywhere in between. In the example below, we’ve highlighted a few of the many places one could choose to measure from the February low, January 1, or the previous high of May 19, 2015. In this case a flat market or correcting stock market takes patience and naturally causes many questions -- and also sometimes frustration. Probably because we’ve heard at some point the stock market averages 10% per year, so what gives? Right?
Hopefully this will help clear up the remaining questions about what is happening, why, and give insight to the question, "can you make money in a flat market?" .
How The Squire Strategy Works
To fully invest what we had worked so hard not to lose, without evidence of a real increase in corporate revenues and profits, would have been guessing and not at all prudent.
As an asset manager who understands the tactics that might slow losses, or reduce risks in your portfolios, I know when we can make a lot of money and when that’s much more difficult to do. When the market is down strongly, we strive to avoid parts of large downdrafts by exiting stocks or positions before the major, elongated parts of the decline. In major updrafts, we hope to own companies that are really growing their businesses, and we hope their stock prices follow and grow as fast, or faster than the overall market.
What This Means for Your Money
By the very nature of attempting to avoid some of the loss, some money might be out of the markets when things turn back up. Markets can turn back up prior to whether or not there is evidence of recovery. It is inevitable that we will likely miss part of that investment return, in turn with our loss avoidance tactics. However, once we have evidence and move more toward being fully invested, it’s possible we may catch up or even outperform the stock market or a properly blended benchmark over a full market cycle. As some of you know, this can happen quickly, just as it did in 2009 when we had some accounts fully recovered by the end of the summer.
Many of you can do the calculations to compare us to the market over a given period of time. You are also right to have high expectations of us. We have set that bar high. We need time to catch up to the market. By God’s grace, we have done that often over the last 12 years and we hope to do so this time too.
The Future Is Bright
We’re in this together. Sometimes your investments grow because of your saving and diligence and sometimes it’s due to our strategic and mindful investing.
If the market is down, it’s your time to shine – the more money you add to your accounts, the faster we can theoretically recover and reach your goals, on time or sooner. As we have evidence of the market improving, it’s time for me to contribute by investing and growing the Squire way. If we work hard together, we should see higher highs and higher lows over time.
The good news is that we are seeing some surprisingly good numbers for many of you this year. Seeing that after the very difficult previous two years, validates our process. It is extremely gratifying, and it is the reason why we love serving each of you.