09-27-2020: Patience is a virtue (right now)

Year-to-Date Strategy Stats as of COB today:

+ 36.44% : Turner Quant Advantage (TQA)

+ 12.70% : Tactical Growth (TG)

+ 1.63% : Diversified Income (DIS)

+ 17.12% : Leveraged Index (LI)

+ 2.09% : S&P 500

Some of you (and you know who you are), just can't stand to be sitting in cash. It gnaws at you... you feel like you're missing out... that you're just being a wimp for waiting. Besides, your previous advisor (you know... the one that lost you 30% back in March and April just before you fired him/her) never went to cash. In fact, most financial advisors and money managers, as a rule, never go to cash. So... if the smartest minds ('so called') in the financial world don't go to cash, why should you? Right?

I went to cash (100%, across the board in all portfolios) this past Friday. Good idea? Yes, and I'll tell you why in a moment. But... before I do, I want to explain why your previous (or current, if it's not me) advisor never goes to cash.

  1. The firm's 'policy' is to never go to cash. This is such a lame excuse that I almost refuse to give it any credence. There is an assumption made by many firms that if they do not have you fully invested all the time, you will think they don't know what they are doing and you can sit on cash yourself and not pay the firm a management fee. But... that's not the real reason. The real reason is: They do not have a strategy that recognizes when risk is too high to be in the market and that the client is better served to be in cash than invested in anything. These firms do not have a go-to-cash strategy because they do not believe in holding cash; they believe that they are smarter than the market; and that is why they lost you 30% earlier this year.

  2. Many financial advisors are not 'really' investment managers; rather, they are marketing managers. They tell a great story about how smart they are. But, in reality, they don't make any trading decisions; rather, they turn over the actual management of capital to a bunch of mutual fund managers who, by the way, pay bonuses, kick-backs, commissions, etc. to the financial manager (or his/her firm) in exchange for the advisor to put the client into specific investments that pay exorbitant (sometimes well more than 20%) commissions (sometimes referred to as overrides) back to the firm so long as the firm keeps the client in those investments. In other words, the firm loses the big payoffs if they let the client go to cash. This is egregiously unethical, but it is done all the time. And, to top it off, these firms are not (yet) required to disclose to their client that they are getting these incentives, of which the client is actually paying for.

  3. Many (most?) financial services firms believe in the "modern portfolio theory". This theory is predicated on the assumption that if you have a well-diversified portfolio of defined risk parameters, you will do better in the long run than trying to actively manage a portfolio of stocks. The big problem with this theory is a bear market. The assumption, using MPT, is you will incur less loss if your portfolio is well diversified. This is true, in most cases, but it fails (horribly fails) to deal with the fact that you will do far better to simply get out of the market than to be "well-diversified into oblivion". But, the MPT will keep you invested all the time, which means you can potentially lose a LOT of money in bear markets; but, the investment advisor can point to the fact that he/she has you invested according to the industry standard modern portfolio theory, and therefore, you should be happy.

But, sometimes, the better course of action is to simply go to cash and avoid potentially large losses. For the buy-side investor (or financial advisor), who does not use inverse ETFs in a falling market, going to cash in a falling market makes a ton of sense. For a financial advisory firm like Turner Capital, on the other hand, the process is more than a bit delicate. Why? Because, we do use inverse ETFs in a bear trending market. Unlike most investment firms, we can play on both sides of the street... it is just a matter of which direction the market is trending.

Right now, the 200-day moving average of the overall market is on a bull-trending slope. But, the market has been dropping for the past month (starting on September 3). This means the short-term trend is bearish while the longer-term trend is bullish. This puts a lot more risk on the table and when risk gets elevated, the safe harbor is cash.

So... last Friday, the data that I use to quantify risk, indicated that being invested over the weekend had too much risk. We were invested in inverse ETFs (in 3 out of 4 portfolio models) and the risk of the market opening a lot higher on Monday became too strong to stay in the inverse ETFs over the weekend. As such, I moved us completely to cash. Granted, we were mostly in cash already, so this was not a big deal, but it does mean that I took risk of loss off the table. While making my clients money is a top priority, the number one priority is to not lose a lot money. This is, indeed, a delicate balancing act... when to jump onto the inverse ETF bandwagon and when to move to the sidelines. I prefer to err on the side of caution in markets like we are in right now.

In tomorrow morning's Client Letter, I will get into more detail about what I see driving the market and how I plan to invest (or not), accordingly, this week. But, for right now, the best, safest, smartest place to be is in cash... and that is exactly where we are. It does take a modicum of patience and that means no guessing and no jumping into the market one way or the other on a whim. Tomorrow, as they say, is another day. We'll see what opportunities surface as the week unfolds. It would take a lot (of bullish data) for me to get back into the market on the bull side, but won't take much at all for me to put some cash back to work on the bear side. The bearish data continue to far outweigh the bullish data (as you will see in my Client Letter in the morning), but not enough for me to be in this market over this weekend.

And, just to put a fine point on the kick-back discussion, above... No one at Turner Capital receives a penny from any investment that we put our client in. 100% of our income comes from ONLY client fees. We do better when our clients do better; it is the right way to run a financial advisory firm.

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