Since the lows struck on March 9th by major US equities indexes, US equities have rallied 50%, international equities 70%, commodities 25% and US REITs 85%!
Yet, if things have been so darned good, then why do most investors feel so badly and so beat up?
The nature of compounding and recovery from negative returns is that it takes a 33.3% return to fully recover from a 25% decline in value. It takes a 100% return to fully recover from a 50% decline in value and it takes a 300% return to fully recover from a 75% decline in value.
Accordingly, apart from fixed income and relative to October 2007 levels, most asset classes are still 25% to 50% in the hole! … And that’s why most investors still very much “feel the pain.”
So what steps can investors take to help protect recent gains while continuing to participate in the market?
With such extended and disparate gains across equities, fixed income and alternative asset classes and subclasses, it might make sense for buy-and-hold, straight asset-allocation investors to consider rebalancing holdings to their target allocation.
For other investors – and with nearly all asset classes in positive trend – the current environment represents a great opportunity to consider imposing explicit exit protocols underneath individual holdings. This can help to protect gains and limit losses in the event of a return to extended negative performance, while maintaining market participation in the present and so long as positive trends persist (i.e., transition to an approach to systematically cut losses short while letting winners run). Nobody gets any merit badges for fully participating in market declines.
