Volatility = Opportunity

We are in the 3rd consecutive month of the S&P/TSX Composite Index being down, equating to about a -8% pullback. A market is considered to be in a “correction” when it falls more than 20%. We are approximately 12% away from that.

6-month chart of the S&P/TSX Composite Index

Source Quotestream

Source Quotestream

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. Refer to the Equity Action Call in the following chart. When the indicators we monitor daily tell us equities are a buy (green zone), 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 (yellow zone), we no longer replace the stocks that fall out of favor. We 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. If we move into the red zone, we sell all equities. We do not fear volatility, because with volatility comes opportunity. 

Source: SIA Charts

Source: SIA Charts

In our more fundamental models, such as our core fixed income and core growth we have scoured the universe to find managed strategies that have historically given much better results from a risk, return and recovery analysis. These are designed to fall less, recover faster, and have historically provided superior performance. 

Times like these show the value of our process. Below is a comparison chart of our Tactical Growth Composite (green line) versus the S&P/TSX Composite Index (light blue line). You can see our tactical model has historically had much less volatility when it has mattered the most because our process will guide us as equities shift to cash and fixed income to help protect against volatility.

Perfection is impossible. Understanding what will ultimately serve you the best over the longer-term is what is most likely the best solution in a complex and emotionally charged environment like investing.

Source: SIA Charts

Source: SIA Charts

Please don’t hesitate to reach out to us at any time for further discussion.