Dominick Paoloni, CIMA®
CIO & Founder
Portfolio Manager, IPSAX
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November 1, 2019
by Dominick Paoloni, CIMA®
CIO & Founder
Portfolio Manager, IPSAX
Adjunct Professor, University of Denver
Adjunct Professor, University of Colorado
Last week I gave a lecture to an investment class at the University of Colorado on “Diversification vs Hedging,” not unlike a recent video I sent you on this subject several weeks ago. What I pointed out in the video, as well as in the lecture, is that there has been a massive shift from equities to bonds. (see Chart 2)
Since there is a high level of fear in the market, there is a strong case to be made that the market will go higher in-light-of-the-fact that the market frequently moves in the opposite of what the masses think. This is called herd mentality. What’s interesting is that there has been a massive number of investors that sold their equities to buy bonds, only to recently watch stocks go higher and bonds drop. This is a great example of the fundamental problem with market timing.
In the last couple of weeks, Bank of America Merrill Lynch published a research paper on the 60%/40% stock/bond mix, which is the most popular mix in financial money management. The research report points out that even though the 60/40 traditional mix has had one of the best years to date, going forward, their report builds a strong case that this mix is an accident waiting to happen.
IPS Strategic Capital is dedicated to building portfolios that define downside risk using hard insurance (protective puts). Defined hedges inside a portfolio are very rare and very few financial professionals feel that they’re possible. Although our work on this objective has had its bumps, my quant team, Patrick and Mahdi, along with a team of brilliant interns, continue to build a defined risk portfolio. This portfolio gives me peace of mind that no matter when the next crash comes, (the average bull market last 48 month, we are currently at 123 months into the current bull market) our client risk is defined.
This personally gives me confidence to tell my clients to stay invested no matter how bad the headline news might get or how volatile the market.
In my 35 years, I have learned that markets go up when investors are fearful and drop without warning when people are complacent. I was a young financial professional on Wall Street in 1987 when the market lost 20% in one day. For this reason, I have dedicated my life’s work to being able to invest people’s life savings and say, “if that happens again, you will be fine.” There is not a typical financial profession in the country that can make that statement with certainty. Why? Because safety through diversification in a market crash breaks down, insurance does not.
In conclusion, before the next election. I expect that the market is going to experience scare volatility, however, as your professional money manager, we are prepared for the worst because we are always protected, always invested.
As always, if you have any questions, please do not hesitate to contact our office.
Have a great Thanksgiving!
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