We are in the 4th consecutive month of the S&P/TSX Composite Index being down, equating to about a -12% pullback. We don’t consider the market to be in a full correction until it falls more than 20%. We are less than 8% away from that.
How do we manage risk during these times? We believe it is not the stock market that is risky, it is manic investor behavior that is risky. If you have a process to manage the roller coaster of the stock market, you will have much more confidence in times like these.
In our Tactical Equity models we use a form of technical analysis called relative strength to manage risk. When our indicators tell us equities are a buy, in our daily monitoring and maintenance we will replace stocks that fall out of favor with ones that are of the highest strength in the index, diversified by sector. However, when our indicators tell us equities are no longer a buy, we no longer replace the stocks that fall out of favor. We simply sell the security and wait in cash. This gives us the “dry gun powder” we need when equities move back in favor and we require cash to start making buys again. We do not fear volatility, because with volatility comes opportunity.
In our more fundamental models, such as our core fixed income, core low volatility, core equity income and core growth we have scoured the universe to fill these components with only the best performing securities from a risk, return and recovery analysis. These are designed to fall less, recover faster, all with superior performance.
Times like these show the value of our process. Below is a comparison chart of our Tactical Canadian Growth and Income Strategy (green line), our Tactical Canadian Large Cap Strategy (red line), our Tactical Canadian ETF strategy (pink line) and finally the S&P/TSX Composite Index (light blue line). You can see our tactical models tend to go flat in times of distress (2008 and 2011), as equities shift to cash and fixed income to help protect against volatility.
Please don’t hesitate to reach out to us at any time for further discussion.
Disclaimer: Our investment models shown in this article may not be suitable to all investors.