The recent presidential election taught us a lesson about making predictions. Basically, as humans, we’re prone to making errors. We saw that play out in the form of the political experts who almost unanimously predicted a Hillary Clinton victory. The prognosticators used polling data, early voting data and political intel to reach their conclusions. These methods have worked to pinpoint elections in the past, but as we well know in the financial world, “past performance is not an indicator of future results.”
The fallout from election results carried over to the financial markets that had baked in a Clinton victory to their investments. When it was apparent that Trump would win, the markets panicked. The Dow Jones Industrial Average dropped 827 points in after-hours trading.1 Futures for the S&P 500 initially dropped 4 percent.2
Had the election results occurred during the heat of a trading day, investors would have likely seen huge losses, but because all of this happened after hours, investors had time to cool off and get control of their emotions by the opening bell the next morning. Frankly, a lot of people were very lucky by the timing. At Beacon, we’re not in the luck business. We are bullish on creating rules-based models that takes emotions and whims out of the equation.
The S&P 500 Model
The S&P 500 is a great example of an entity that develops a set of rules and sticks to it: Follow the 500 largest capitalized companies. That’s all it does. It doesn’t think. It doesn’t panic. It doesn’t get greedy. That’s why the S&P beats the vast majority of managers every year because it sets those rules and follows them.
At Beacon, we believe if you follow a general philosophy based on a set of rules, you will do much better in the long run than going without one. A plan takes out impulsiveness, gut feelings, and greed. It doesn’t mean the strategy you choose will be right every single time, but if you follow a strategy that has sound fundamentals, we think that you have a much better chance for success in the long run than if you were to jump from strategy to strategy.
Over the last two decades, we have seen too many individual portfolios fall short because of bear market blindness. As long as the bull market is chugging along, most investors are happy, but what happens when that bear takes over? Investors suffer, with the average portfolio’s earnings barely keeping up with inflation. Individual investors earned just 3.83 percent from 1992-2012, compared with 9.14 percent return on the S&P 500 and 6.89 percent on the Barclays Aggregate Bond Index. (Dalbar Inc. – do we have a link or specific document to source?)
How do we overcome a bear shortfall at Beacon? We follow a basic principle with all of our portfolios by putting a stop-loss in place because losses are more powerful than gains. For instance, with our 2.0 portfolio, the trigger goes into effect when our internal equity benchmark index drops by 10 percent. We do that because historically we know there’s a roughly 50 percent chance the market will continue to drop by 20 percent or more.
The 3.0 portfolio has allowed us a tremendous amount of flexibility because we can sell each sector/holding individually versus a selloff of the entire portfolio. We saw the need for this added flexibility with the market volatility occurring in August of 2015. As a whole, the equity index was down 10 percent, which triggered our Vantage 2.0 sell, but the energy sector was down 43 percent. We asked ourselves, why sell the entire portfolio when nearly half of the drop occurred in that one sector?
The beauty of either portfolio is that they are done mechanically. There is no human element involved, no impulsive grab, hoping that the market or a sector will rebound in a certain way.
And The Winner Is…
We witnessed the financial panic that occurred on election night, but we didn’t experience it ourselves. While market volatility yo-yoed from one end of the spectrum to the other, we remained steadfast to our principles. As far as our holdings were concerned, it didn’t matter who won the election because we had the same plan in place regardless of a Trump or Clinton victory, and we believe the real winners that night were our investors whose investments would not be swayed by the recklessness of human emotions.
To learn more about our investment philosophy, visit BeaconInvesting.com or contact a wholesaler in your area today!