Portfolio Changes: Preparing for Stock Volatility

October 26th, 2017 by Anchor Bay Capital's Investment Team

The stock market reaching new highs has become familiar news this year and as investors we have been experiencing positive returns with very little worries.  This has been an incredible phenomenon to watch stocks have such resiliency in the midst of a very combative political climate.  Throughout the year, the trend in the stock market has been to shrug off bad news and stay on course.  The result has been a year with very low volatility.  The chart below shows that only 1964 has seen smaller daily changes than 2017:

(Source: https://lplresearch.com/2017/10/24/would-higher-volatility-mean-a-bear-market/)

With such a steady upward trend, the natural thought is: How much longer can this last?  The truthful answer is we don’t know, but it can’t last forever.  While economic indicators point toward the probability that the stock market will continue to be strong throughout the year, at some point volatility will return.  We still have some significant risk factors which we feel could potentially have an affect on the market: NAFTA issues, North Korea and Iran tensions, partisan political infighting, tax reform and rising interest rates are some of those factors which could unsettle the market.

What does this mean for you?

We should always understand that trends can change quickly, as we saw in 1987 and 2010, and we should be ready when they do. When there are periods of weakness, this creates opportunities to buy stocks at lower prices.

From investing lessons learned over the past 30 years we feel that it was prudent to trim some stock positions in our investment models in order to raise some cash.  This doesn’t suggest that we get out of the market, but we implemented this tactical move for the following benefits:

• We are able to capture some of the return realized over this last year.
• We are adding some protection against a correction in stocks.
• We are holding cash equivalents that provide liquidity for when we can reacquire stocks at a favorable price.

We thank you for your continued trust in our Anchor Bay team and should you have any questions please feel free to contact us at your convenience.