Preparation & PrudencePosted: May 21, 2010
“Before anything else, preparation is the key to success” – Alexander Graham Bell
“Chance fights ever on the side of the prudent” – Euripides
Back in November-December 2009, I made the decision to lighten our exposure to stocks. The S&P 500 was around 1100 and up considerably from it’s low of around 670 in March. Since that time, we have experienced a trading range, basically from 1100-1200, and volatility has increased.
On May 4th, I sent out a client email that said “The last two weeks, we have seen increased volatility in the markets, with several daily movements greater than one percent. This volatility indicates to me that we are possibly hitting a ceiling in the equity markets. Combine that with the prospect of higher interest rates, and a lack of increased sales, I do not have a lot of optimism for much more upside.” Well, volatility has not subsided, and the S&P 500 today closed down 3.9% at 1071.59.
When I made the decision at the end of 2009 to sell off a good portion of our stock allocation, I was concerned about several things:
- Lack of corporate revenue growth
- Low interest rates
- High levels of debt
These are now the issues causing much of the volatility. Our preparation may have been a bit premature, but I believed they were the most prudent thing to do at the time, and it appears to be playing out.
As I have said before, I’m willing to give up a bit of top line growth to cushion a much greater loss. The uncertainty in Europe, combined with increased unemployment in the States and a lack of revenue growth will, in my opinion, perpetuate this volatility and downward trend for the immediate future.
I cannot guarantee above-average returns, but I am confident that our portfolios are structured to weather this storm because we have made prudent moves to do so. As a firm, we have a fiduciary duty to invest in our clients’ best interests. I believe that now is not the time to take exceptional risks but to play defense, and that is what we are doing.