Once upon a time I used to really enjoy seeking out the latest and greatest roller coaster offerings with my two kids. Today, while my 10 year old still begs for day trips to various Mid-Atlantic amusement parks, my appetite for tolerating a 400 foot smooth, but gut-wrenching drop, or a head shaking experience on a rickety wooden coaster has become veritably less. When you look at the queue line for a popular coaster over the weekend, you’re not likely to find a high percentage of mid-life-and-older riders.
The gradual declension in one’s thrill-ride desire is really parallel to the risk taking we see as an investor ages. When one is younger and has time on their side, there is generally a rush to seek out aggressive growth vehicles. Tolerance for steep drops and unexpected problems is much higher. However as an investor ages and life circumstance changes, the ability to stomach paper loss of capital or decline in income becomes a bit more difficult to shoulder.
Of course the single mid-life male may view things much differently than working parents with 4 kids to feed, college to save for, and a retirement to fund.
In any case, each investor must evaluate circumstance and decide for themselves what kind of risks they are willing to take. It would be far more understandable why a 25 year old loads a portfolio up with Twitter Inc , Tesla Motors Inc , and Amazons than the retiree who does the same thing, but is unsure if they will outlive their capital or not.
Today’s Market
For better or worse — probably worse — investors need to be able to shoulder tremendous volatility today. Multiple hundred point swings in the DJIA have become commonplace as investors assess a host of domestic and global economic issues. Concerns over commodity prices, the real estate market, and corporate valuation/prospects are also having an impact. High frequency trading, which boosts market liquidity, but also impacts volatility, seems to be a steadily increasing, problematic issue.
As the way in which we do business becomes more complicated, so does the way in which our markets operate. The Internet revolution and digital economy have connected us all, increasingly relative productivity in the process. But the rapidity of change has also brought about uncertainty in the eyes of investors. Similar to what we saw 15 years ago during the technology and Internet bubble, some disruptive tech enterprises are being valued with stratospheric pricing. Elsewhere, the market is handing out a mixed bag of pricing with a seemingly inconsistent rationale in my view.
Unfortunately all of this complexity is not something that can be changed. Instead investors need to adapt to what is occurring around them and allocate capital in the most informed fashion possible.
Safe Is In The Eye Of The Beholder
While there are some textbook rules of thumb relative to how allocated or levered you should personally be to common stocks or the equivalent, there should be a more nuanced additive approach involved. Also, defining whether today’s market is “safe” or not to enter deserves a multi-angle assessment.
Clearly, when we take a look at a YTD market chart, “choppy” is an apt descriptive. We also have the 1,000 steep roller coast drop back in August.
For longer-term investors with a diversified portfolio and a solid plan in place, I think you stay the course and ride out the volatility. For those with a bit more active bent, this has become an opportune market for adding on the dips and selling the upward blips. Instead of wholesale buying and selling, the investor can be an “accumulator” and a “parer” of stocks.
For new money, given the still heightened valuations out there, I think you adopt a dollar cost average strategy for position building, not taking large risks on any one company at any one time.
Some specific equities that I really like right now that have good earnings momentum include diversified industrial/technology player Honeywell International Inc. , business consulting firm Accenture Plc , and on the value side, General Motors and New Senior Investment Group , a real estate investment trust which owns independent/assisted living housing assets.
Given the macro-risks that abound, the stock market is generally never a “safe” place to invest. However, by picking solid stocks and securities in terms of both EPS growth potential and current valuation, investors can succeed even with near-term bouts of uncertainty and higher than normal volatility. Don’t necessarily be afraid to get on the roller coaster here, just be sure you understand what the ride may be like.
Adam Aloisi was long shares of Honeywell, Accenture, GM, and New Senior at time of writing, but positions can change at any time.
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