Columnists John Grace Opinion

ON THE MONEY: New year brings new risks for those testing the market

2019 was a terrific year for investors on everything, everywhere.

The first trading day in 2020 started off with a bang followed by a killing that should scare unprepared investors.

Rather than fundamentals, last year’s market was built on hope, easy money, and stock buybacks. Please let me remind you what I said on more than 60 news interviews last year. Enjoy the melt-up as you simultaneously prepare for a slow-down, followed by what could turn out to be a melt down.

According to me, investors don’t need to see the future to prepare for it. When walking across the street, it’s not the bus you see that could disrupt your day, it’s usually the bus you did not see, and could not name or time its arrival. 

Any “one event that dents the very driver of hope could dramatically shift risk sentiment in equities for an extended period,” said former Lehman Brothers analyst, Brian Sozzi, now at Yahoo Finance on Jan. 3. Sozzi went on to say, “Investors are about to be reminded of that painful lesson.”

Gen. Qassem Soleimani was killed in a U.S. drone strike in Baghdad, reported the Pentagon, Jan. 2. Soleimani was known to be a key player in Middle East politics who led a special forces unit of Iran’s revolutionary guards. Reports indicate that he was involved in recent U.S. embassy attacks in Iraq and had plotted attacks against U.S. interests in the area.

Soleimani, Iran’s most powerful general, was no angel, as he was known for killing hundreds of Americans over the past 20 years, per Fareed Zakaria on CNN, Jan. 2. On the same show, Retired Lt. Gen. and former Army Commanding General Europe and Seventh Army, Mark Hertling who served in the region stated, “Soleimani is a killer, but soldiers love him.” 

Hertling, now a national security, intelligence and terrorism analyst, went on to say that Soliemani was known in Iran and Iraq as a “living martyr.”

Such a description has been known to inspire the living to do things they wouldn’t have done before to honor their dead. 

“The Iranian actions will stop short of what we would consider war. Overall, the chance of war is 40%,” asserts Eurasia Group strategist Henry Rome, Jan. 3. As Sozzi said, “That’s hardly comforting.”

Continuing, Sozzi wrote, “As for investors, the rising tensions with Iran shouldn’t be completely disregarded as a one-day event. Remember, the record setting stock market gains of 2019 — and strong start to 2020 — has been powered by hope — in part by hope that the U.S. economy rebounds in 2020 amid a more certain outlook on the trade war. And hope that earnings growth from corporate America will hit 10% — or more — on the back of low inflation, low oil prices and low rates from the Federal Reserve.”

According to me, it’s not about the prediction about what might happen. It’s all about the preparation. While many of my peers have one song to sing, ‘Stocks for the long haul! Hold and hope. Buy and hold no matter what!” Over the past 40 years we have developed an entirely different perspective. Here are the three strategies we use for our clients in volatile markets:

1. The time was taken to assess their personal risk radar. Savvy investors like knowing in advance how much loss is acceptable.

2. We employ active management strategies that can move out of risk assets to cash or alternatives in a bad year (2008), and back from safety to risk assets in a good year (2009). By minimizing losses, investors don’t need a Hail Mary pass to stay in the game.

3. In the spirit that there’s always a bull market somewhere, we diversify as much as possible so that there may be gains enjoyed at the end of the year that were difficult to foresee at the beginning of the year. 

And we always keep in mind economist John Maynard Keynes’ mantra: “Markets can stay irrational longer than you can stay solvent.”

John L. Grace is president of Investor’s Advantage Corp, a Los Angeles-area financial planning firm that has been helping investors manage wealth and prepare for a more prosperous future since 1979. His On the Money column runs monthly in The Wave.