A sudden, October storm engulfed US stock markets, sending indices down around 10% but doing even more damage to recent high-flyers like Amazon and Netflix. It should not have been a complete surprise given trade disputes, political tensions, and rising interest rates. In the lead up to the downturn, it made sense to slowly build cash levels, delay putting new cash to work into stocks, sell off financially challenged companies, and, in general, do a checkup on personal risk tolerance in the event of a stock sell-off. In truth, however, even if you did all these things, as we at Arrival Capital tried to do for our clients, a sharp financial reversal can test even the hardiest investor's mettle. As Mike Tyson once said, "everyone has a plan until they get punched in the mouth."
Now that such a punch has been delivered, what next? To start, take a breath. Go over on paper or just in your head your cash needs over the next six months. Is all that cash somewhere safe and accessible? What about big ticket purchases? Are all of those far enough on the horizon that it still makes sense to count on 7-8% a year stock market returns over the long term to help fund those plans? As long as the answers to these key threshold questions are "yes", then the next phase is to systematically review your stock market exposure. Simply stated, that means looking at your biggest positions and re-assessing their intrinsic worth over time vs. their current market value. If the intrinsic value is less than even the reduced market value, then it is probably time to move on from the investment. Next look at overall portfolio weightings. No position should account for more than 5-10% of your overall portfolio. Nothing is certain, after all. But before selling consider tax implications. Depending upon tax bracket and where the positions are held, selling a big winner can mean an immediate tax haircut of 20% or more of the cash raised. Then look at your industry weightings. Too much tech or healthcare, for example, so that your net worth is too closely linked to fluctuations in these industries should also be adjusted. Finally, after all these exercises are satisfied, and you have enough cash and portfolio balance, then it is time to be opportunistic; because we know that some individual companies will continue to prosper and create value that ultimately will be recognized by the market as a whole. As investors, the time during and after market sell-offs is the right time to seek opportunities in undervalued companies that have been sold off indiscriminately to the point that current and future value is there for the taking for opportunistic investors with the time and patience to see things through.
Volatile markets can make for rash decisions. We all remember 2008-09 and the financial panic, when stocks lost 40% of their value. The re-build from that, in confidence and net worth, took years. Only in hindsight does the decision to stay invested look easy or smart. But what is smart is the search for value. What makes sense is to have exposure to the best managed companies, the most innovative businesses, and the most promising technologies. Stock market sell-offs, corrections, and even prolonged bear markets are what gives investors access to these investment opportunities at prices that do make sense over time. Our best investments are not when stock prices are at their highest levels, when everyone is in, but instead come when fear is high and prices are cheap. At Arrival Capital, we spend much of our time researching and monitoring potential investments that can create wealth for our clients as part of a personalized portfolio. Often it comes down to then being able to buy these companies at the right price. If you can find enough promising investments and buy them at the right price, then you have gone a long way to ensuring a prosperous financial future, even if it that means sometimes having to endure the type of uncomfortable sell-off we are going through now.