It is widely accepted that a portfolio diversified across a number of stocks will provide an inherent return over time, that buying and holding stocks for the long term is virtuous and pragmatic, and that the longer your perspective, the lower your investment risk.
This strategy is flawed because it is based on a single set of baseline conditions and return drivers, and there is no guarantee that the future will not deviate significantly from the past.
In fact, “past performance is no guarantee of future results” is a required regulatory statement for registered investment advisors like my firm.
Year to date the widely followed S&P 500 stock index that tracks 500 stocks, fully invested, all the time, is down -25% for 2022.
In the chart, we show the index is about 9% below its 50-day average and 14% below the 200-day average. These simple trend-following indicators have signaled defense most of the year, and you can see the red when they’re underwater.
Though it’s oversold on a short-term basis and could see some countertrend follow-through from yesterday’s radical swing, the primary trend is clearly down. So, we declined to participate in its descent like a passive investor does.
Investments and markets require active risk management to avoid larger losses and to create the positive risk-adjusted investment returns people want.
Active risk management and hedging aren’t a sure thing, either, but for me, it’s far better than just sitting there doing nothing.
You can probably see why I’ve preached active risk management and dynamic hedging for drawdown control for over two decades.
More importantly, I’ve done it.
Investing involves risks of loss you must be willing to bear, or actively manage and hedge.
All our endeavors involve some degree of risk, but we all get to tactically decide which risks we want, and which we prefer to hedge off.
Check out our new website, which is a work in progress. We’ll eventually transfer these observations to the new site. https://shell-capital.com/
Mike Shell is the Founder and Chief Investment Officer of Shell Capital Management, LLC, and the portfolio manager of ASYMMETRY® Managed Portfolios. Mike Shell and Shell Capital Management, LLC is a registered investment advisor focused on asymmetric risk-reward and absolute return strategies and provides investment advice and portfolio management only to clients with a signed and executed investment management agreement. The observations shared on this website are for general information only and should not be construed as investment advice to buy or sell any security. This information does not suggest in any way that any graph, chart, or formula offered can solely guide an investor as to which securities to buy or sell, or when to buy or sell them. Securities reflected are not intended to represent any client holdings or recommendations made by the firm. In the event any past specific recommendations are referred to inadvertently, a list of all recommendations made by the company within at least the prior one-year period may be furnished upon request. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on the list. Any opinions expressed may change as subsequent conditions change. Please do not make any investment decisions based on such information, as it is not advice and is subject to change without notice. Investing involves risk, including the potential loss of principal an investor must be willing to bear. Past performance is no guarantee of future results. All information and data are deemed reliable but are not guaranteed and should be independently verified. The presence of this website on the Internet shall in no direct or indirect way raise an implication that Shell Capital Management, LLC is offering to sell or soliciting to sell advisory services to residents of any state in which the firm is not registered as an investment advisor. The views and opinions expressed in ASYMMETRY® Observations are those of the authors and do not necessarily reflect the position of Shell Capital Management, LLC. The use of this website is subject to its terms and conditions.