Sometimes you get an unexpected wake up call, a call to action if you will. If it happened in your hotel room, the famous errant alarm clock going off, well in that case you just push the snooze button, grumble a bit and go back to sleep at 2:45 a.m. Then, there is the other kind of wake up call, not just the annoyance version. This kind of call to action comes based on something truly significant and it can be so very important to evaluate or re-evaluate something of considerable importance such as your health, a family matter, or financial situation. It’s the latter mention that I will be focusing on in this article.
Let’s first consider the financial sequence that closed out the third quarter of 2015. Most financial assets were in a normal sequential, ebb and flow, the usual risk and reward sequencing made the process challenging as always, but rational in terms of expected give and take. Then, almost without warning, a series of contagion events hit and even for many well diversified portfolios, all hell broke loose.
What happened so suddenly? The cast of characters included imploding oil prices, China's economic slowdown, the yuan's revaluation, mega concerns that at any moment the Fed would alter their policy from a near zero percent interest base rate, and that the dollar was therefore EITHER due to implode or explode with tremendous flows of money, (a lot of it foreign), seeking or leaving safe harbor and the comfort of U.S. treasuries. Precious metals were also pushed significantly lower, but some market predictors affirmed this HAD to explode in value, even though it had been in a severe decline for years, as many other areas were suspect, this just had to be the outcome for precious metals.
In this vicious cycle, the stock market went through a severe retracement that started as a correction, (a decline of 10% from recent highs), but then went further and fell to or exceeded bear market percentage declines, by definition a drop of over 20% from recent highs. That occurred in many sectors and close to that amount and even more in certain major averages. Some were convinced that a deeper leg down was imminent despite what had already transpired.
The decline hit even mundane sectors that were considered safe by many including blue chip, conservative good dividend paying stocks, and even utilities, a major place for conservative income seekers. In a lot of cases the severe declines occurred in just a matter of weeks which had many attempting an exit for safety and asking questions about what just happened and why?
Many panicked with the losses at hand, and a substantial amount of money was both lost and made. As an inconvenient truth mention, if one were nimble enough to have profited from this, and some did of course, were they simply lucky or more strategic in how things prevailed? If one had focused exposure in many equity sectors, and had money in energy and/or were on margin, the losses might have been very consequential with the outcome resulting in many questioning whether their previously assumed to be rational portfolios were indeed just that. Even utilities and REITs suffered large losses as concerns about interest rate policy dogged the market and those aforementioned areas were considered to be among the safest places to have exposure.
An inconvenient truth "ah ha" gut check again. That punch to the gut for many (not all of course), begged the question whether the U.S. and even the worldwide bull market had abruptly ended with cause/effect, and the fear was pervasive that it could get a whole lot worse. Losses of 20% or more were just the START of the unwinding, and that this late summer tsunami was indeed approaching crisis proportions. Yes, this time brought a different set of prevailing circumstances than the bank and financial crisis of 2007/2008.
That is a truncated version of what DID occur and the question is did you learn anything about your true risk exposure and how volatile even the most balanced of portfolios can be? If you concluded that nothing warranted attention, and no risk mitigation was needed, even after out-sized losses were absorbed, then you may be in the minority. Are your personal comfort levels just as good as before? For many this was a painful reminder that some change should be taken given the extraordinary volatility that just might be the new normal.
This recognition for many, even in effect some "veterans" who have spent a lifetime as professional investment counselors/brokers, and even some named billionaire investors said they had really never seen anything quite like this. That made me realize just how profoundly different, and concerning the message of this cycle was and continues to be. For many very astute investors, this was a true game changer. Having just turned 60 it reminds me of that old TV game show Truth or Consequences and this was one of those moments that the term takes to task, quite literally.
The question that I want to pose to you, is with this cycle coming on with such sudden and unexpected velocity and acknowledging that this may have caused some real pain and anguish, would it not have been better to have prepared WELL IN ADVANCE and already have a reduced allocation of conventional assets already in place? In effect, the question is and remains, why subject your entire portfolio to such volatile and unforeseen circumstances? Why not consider a reasonable allocation to an asset class that is largely UNAFFECTED by this aforementioned market risk and volatility, and in weather terms, would have hardly felt anything other than a passing Spring shower?
It’s for these very reasons of market volatility that I allocated a proportional amount of my personal portfolio to the rare U.S. coin market. I got my wake-up call almost 10 years ago, when I first invested, in earnest in this space while still allocating portfolio interests to the conventional areas. My background in the investment area included leading positions in major Wall Street investment firms, almost since getting my MBA in 1978. I think I understand the general investment marketplace pretty well, and again, vis a vis the Q3 2015 shakeout I received the important reminder that a strategic allocation, in proportion to conventional exposure, can reduce stress and volatility experienced by the portfolio and individual.
The U.S. rare coin market has withstood volatility crises and economic downturns, and most anything else you could have thrown at this investment category because the market is so well supported by already wealthy investors who support values and pricing. These aforementioned investors and specialists did their homework years and even generations ago. They may have previously entered this space and allocated for quite possibly the exact reasons that you are now considering.
You may just be hearing about this asset class for the first time or maybe you are now recognizing that it's finally time to move some of your existing portfolio away from so much market volatility. By the way, you may assume, based on the history of rare coins, that there will be more money coming into this space, thus supporting YOUR existent exposure. In that way the investors who followed you also possibly came in because they too saw the advantages of the exposure and the asset class.
The differentiation that this non correlated asset class brings may provide you with a much higher level of comfort especially with assets you want to be both productive and stable in value irrespective of other political, economic, or financial cycles and their perceived associated risks and unknowns. This just may be the appropriate time to consider that reasoned and appropriate reallocation and removal of profit and even principal from other correlated investment areas. I remind you the notion is to consider an appropriate and prudent allocation as part of a broader portfolio composition.
With so much market volatility and external factors such as concerns over China, North Korea, Syria, ISIS, Russia and Putin, Iran and its potential nuclear threat, as the prevailing backdrop to a challenging and ever-changing market even external non monetary threats may cause the next cycle of disruption. Be reminded that it's always something different that can be a catalyst for the next extreme market reaction(s).
Consider valuations and volatility risk with stocks and bonds which are typically a large component of a conventional portfolio. Also be cognizant that bonds may possibly be a sector that could experience considerable future price volatility and may entail significant risk in future periods. Imagine if the Fed really started a series of interest rate hikes and what kind of pressure and even contagion impact such a change of interest rate policy might create. So for all these economic, political, monetary, and related reasons, do consider whether you are positioned in the best way to achieve long term success with the right amount of conventional and non-conventional portfolio exposure.