I always like to look at how specific investments perform in a sharp down draft like we had in December of 2018. This gives me clues as to what works and what does not work. This past December was one of those market swoons where everything went down pretty much. The trick is to study what was affected the most and what was affected the least.
What I discovered was that value investments tended to do very poorly in comparison with low volatility. In the past, value investments were the only choice when it came to buying low and selling high investments. However, with the advent of factor investing, we now have more choices such as equal weighting and low volatility investments. These two categories held up better than value did last December.
In addition, there is another very niche category that I like developed by Morningstar. This niche category revolves around their Moat process. This Moat process is where they evaluate publicly traded companies that are almost monopolistic and or have very strong barriers to entry from competitors. In addition, they generate a lot of free cash flow. Think of Amazon, or FedEx as companies with Moats. VanEck Vector Funds have signed on with Morningstar for their Moat strategies and are now offering a few different Moat based ETF's.
If you ever read one of my books, then you know the secret to investing is not to kill it on the upside, but rather to minimize the downside (volatility). These equal weighted, low volatility or minimum volatility investments have now had their mettle tested with the December swoon and they performed as advertised. You have to be careful however, and not just invest based on a name, because some funds may have these words in their name, but not perform as expected. Instead of looking at up performance, what you really want to do is evaluate down performance, specifically, December 2018.
Who cares if an investment went up 5% in November? If it lost 14% in December, then it is too volatile. That is not the kind of volatility that is advantageous for your portfolio. Okay Kemosabe? I can say that because I am part Native American, so get off my back, will you? I only have to go back to my maternal grandmother to find my Native American heritage. I am not like some people who are having to go back 9 generations to find a link.
Sorry, I digressed. Of course, I am way oversimplifying things here in this post, but there is a way to build a portfolio with moats, equal weighting and low or minimum volatility that should hold up well in this next swoon. However, you might need someone who knows how to do this. Hint: That would be me!
If I can help you, then give me a call at 904-460-2700 or reach out to me at rick@marianfs.com.
