Learning Your Way Through a 7% Loss in the Market

The latest installment of the long running series, “Until the Day Breaks and Shadows Flee,” hit investors this month, producing relentless shock waves around the financial markets - handing investors with sizeable losses in its wake.

Through a heartless dose of fatalism, the drama/thriller created an imagery of investor fear and despair – likening a Fed tightening cycle to a twilight that was always dusk and always raining.  Petroleum markets were painted as a dismal winter evening where time seemed to have paused.  The leaden skies and greasy pavements of Shanghai – perfect atmosphere for the invested rank-and-file to tramp thru with the silence of a funeral dirge.

And similar to every installment in this long series, January’s thriller delivers its usual predictability.  Market sentiment shifts, equity market gets slammed testing the collective will of the long-only equity world in which we live.  Losses mount, experts become abruptly bearish, risk-limits are breached – forcing firms, funds, and families into a whirlpool of fear, remorse, and self-pity.

When will the shock value of it all cease to entertain?  How many will learn to embrace the notion that perhaps sentiment has caused prices to fall - not values!?  Perhaps the fear is born from our bored complacency, where society has largely decided to abolish itself from anything other than the accumulation of wanton greed – the chasing after the wind?

The rush for the “next best thing” has polluted us into stupefaction; we are overly anxious, overly dramatic – not far different from the person blowing a trumpet to bring down the walls of his own city!  To the investor – and according to what you may perceive from the media – the financial markets and your investments are now coming unwound, bit by bit.  It’s different this time – recompense is far overdue!

We cannot understand even the beginnings of investing without knowing something of the world to which it came.  We invest in a world where every pathway, after a few miles, splits into two, and each of those into two again, and at each split you are imposed to make a decision to buy, sell, rebalance, or panic.  The countless and constant decisions we make are a direct result of what we believe to be true.  And, make no mistake, we are – by nature – definers of what we think is good and plausible and we then craft our gods accordingly.  Sadly, this is a lethal combination – making us vulnerable to small gains and large losses.

Fortunately this pattern of investing can be undone, but it cannot develop into good.  Time or fitful fortune does not heal it.  Like an accounting error, right thinking and right action can be put right and best by going back till you find the error and working it afresh from that point, never simply by going on.

Assuming you are invested in a balanced portfolio of stocks and bonds and will remain so for an investable period (i.e. an investment cycle), why not further diversify into a managed futures strategy?  Why not allocate to an asset class where history has shown to be largely uncorrelated to traditional stocks and bonds?  Where history has shown this asset class to be non-correlated to traditional portfolios in rising markets and negatively correlated in falling markets?

Managed Futures is an asset class synonymous with registered Commodity Trading Advisors (CTA), trading exchanged-regulated products on behalf of their clients.  Formerly reserved for ultra-high-net-worth investors and institutions, the managed futures industry has become accessible to the individual investor over the past five years through SEC 40-act funds.

There is a vast amount of diversity within the managed futures industry.  There are single manager, single product funds to multi-manager, multi-product funds.  There are funds that are simply retail subsidiaries to its institutional foundation and thus can provide the investor with the benefits of managed accounts, intensive due diligence, risk-monitoring, and third-party administration.

What’s similar is these funds aim to provide non-correlation independent of traditional and alternative investments, diversification among multiple strategies, transparency of exchange listed futures and currencies, and  non-directionality as there is equal ease and cost to be long (buy) or short (sell).

Unsurprisingly, the managed futures industry has done quite well in January, 2016.  Market volatility and sustained trend have been painful for stocks and bonds yet sheer pleasure for managed futures.  It’s been said that bread eaten in secret is pleasant.  I find it gets stale rather quickly.