McMurtry Investment Report & Model Portfolios

McMurtry Investment Report Newsletter – November 2018

November 2018 – Taking Market Risk off the Table

Peter McMurtry, B.Com, CFA, Financial Writer for Do-It-Yourself Investors

Monthly Investment Newsletter

The real benefit of an experienced money manager comes to light much more in a falling market rather than during a bull market. Passive index funds and ETF’s tend to fall much more on a relative basis in a bear market as they are normally fully invested and rarely take profits until they incur redemptions.


Bob Hager, the co founder of Phillips, Hager & North investment counsellors, stated “Starting a bear market with 70% of your portfolio in stocks and having only 50% in stocks at the beginning of a market recovery is a sure way to lose ground”


There are numerous ways to de-risk your portfolio.



The simplest and lowest cost alternative is to raise cash. This provides the most flexibility to get back into the market when valuations become more attractive.


Buying put options involves paying a premium for the cost of insuring your portfolio. This can work out but it is most definitely a higher cost option.


Writing call options provides some extra income and lowers your breakeven cost for your securities.


However it is not nearly as flexible as raising cash. Unless you have a margin account that has additional risks, you cannot sell the stock in question until you buy back the option or the option expires.


Using stop loss orders is a little gimmicky to me. You may end up losing your stock positions only after a very short term correction in the stock, only to see the share price rebound right after. Most of the experienced money managers I know do not use stop loss orders, although there are some where this strategy works for them.


Better diversifying your portfolio using hedge funds and non traditional assets is usually a good strategy to de-risk your portfolio. However these alternatives are normally only for portfolios in excess of $1 -$2 million and involve holding positions for an extended period that limits flexibility and liquidity.


Switching investment strategies from passive index funds and ETF’s to active management is a good strategy to lower portfolio risk.


Finally you can use equity sector rotation strategies to switch into less volatile sectors such as REIT’s and utilities. Once again this is normally a very effective way to de-risk.


I have written many times in previous newsletters and blogs about the inflexibility of large financial institutions who manage your capital. These organizations seem to be more preoccupied with compliance to avoid the threat of being sued if an account is off base with their long term asset mix.


This compliance orientation makes these institutions less likely to make major asset mix changes even when it is totally warranted by the market outlook. Once your account is slotted into one of their cookie cutter asset mixes, there is very little leeway to alter the overall asset mix beyond a narrow range.


Having worked in this field my whole career, I have seen many instances where the clients’ overall asset mix hardly changes during an economic recession where the stock market falls sharply. Only if the client actually requests a change to a less risky portfolio is the change made and in many instances the financial institution still tries to talk the client out of their decision.

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