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Strategic Insights

Volume 9, Edition 27 | August 3 - August 7, 2020

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The Temptation to De-Risk

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min


With stocks nearing all-time highs, it is a good time to remind investors that de-risking should be driven by changing circumstances not changing markets.

Contributed by Doug Walters , Max Berkovich , ,

Stocks put in a positive performance this week, up over 2%, and are now solidly in the green for the year. This performance comes despite no deal on the next stimulus bill and still a wide gap between the House, which has proposed bringing down the size of their bill from $3.4T to $2.4T and the White House, which says it cannot go far above $1T. Expectations are for a $1.5T compromise, but the path to that number is still very unclear.

With uncertainty in the air, and the stock market approaching all-time highs, we are increasingly fielding questions from clients wanting to “de-risk.” There are two types of de-risking; one is sound financial planning, and the other is gambling. The first has to do with an investor’s changing circumstances. For example, an investor who inherits $1,000,000 may find that they either no longer need to take as much risk, or that they now have an ability to take on a lot more risk. The second is the investor whose circumstances have not changed but thinks the market is “getting expensive” or “has run too much” or that we are “due for a pullback” and wants to take some risk off the table. This is market timing and a dangerous gamble for long-term investors (see our whitepaper on the subject).

So are we saying the market will not fall? No. We cannot predict the future and do not base our investment decisions on the unknown. Rather, we take an evidence-based approach to managing portfolios, and the evidence says to avoid market timing. If you are still concerned here are some facts to consider:

  • Stocks go up a lot more than they go down, so on average, exiting the market is going to be the wrong decision for long-term investors (and don’t forget, even if you are right on the way out you also have to correctly predict when to get back in).
  • Sitting on the sidelines and missing just a few big market days can be devastating to long-term returns. As our whitepaper shows, missing just ten days over 20 years could cut your annual return in half. Do you want to be out of the market the day that a successful vaccine is announced?
  • The recent rally has been heavily driven by the strong performance of “The Big Five” (Apple, Amazon, Alphabet, Microsoft, and Facebook). These are some of the largest companies that are currently driving the market. However, when a vaccine allows the economy to normalize, the cyclical, industrial, and retail companies could lead the next leg of the rally.

These are times that try the nerves of investors, and at some point, the market will pull back again, maybe in this crisis or perhaps the next. But trying to predict the ups and downs has never been a good investing policy. We recommend well-diversified portfolios, at a level of risk appropriate for the investor, and would avoid a pure market-cap-weighted approach to ensure you do not get caught out if The Big Five pull back.

Headlines This Week


  • The unemployment rate fell to 10.2%, slightly beating the Street’s expectations. 
  • The recovery in employment is moving in the right direction, however, some analysts noted the pace of the recovery being slowed by the resurgence of COVID-19 in many southern and western states. 
  • The Labor Department said job gains occurred in hospitality, government, retail, business services, and health care. 
  • The weekly report still had over a million initial jobless claims, but continuing claims fell to 16.1 Million.  

Global View 

  • China’s exports showed strong growth in July. 
  • German industrial production highlighted a strong rebound in June but remained below the June 2019 level. 
  • Tensions continue to be high with China as President Trump signed executive orders prohibiting US residents from doing any business with TikTok and WeChat after 45 days from now.  

Yield Compression 

  • The 30-Year Treasury yields are hovering above 1.2% as investors are allocating some capital to fixed income.  
  • The long- and short-term yields remain near an all-time low. 
  • If inflation remains near 2%, fixed income investors will receive negative real returns on their investments.  

The Week Ahead


The U.S. will release its Consumer Price Index (ex Food & Energy) for July on Wednesday.

  • Consensus figures see the index ticking up 1.2% year-over-year, which would remain unchanged since last month.

Consumer Check

U.S. Retail Sales figures will be released on Friday.

  • The market will be looking at this report to gauge the true extent of the pandemic on retailers over the last month, as states grappled with starting and stopping their reopening measures.
  • The University of Michigan Consumer Sentiment Index is out as well on Friday.

Across the Pond

Second Quarter Gross Domestics Product from the European Union and the United Kingdom will be released.

  • The numbers will be ugly, but this is backward-looking, and as we learned from our print at home, investors will look forward, not backward.

Beltway Buzz

Congress continues to debate the fate of the next round of COVID-19 related stimulus relief, but despite statements of positive developments, there is no guarantee of a quick resolution.

  • We are also waiting for a running mate announcement from former VP Biden.

About Strategic

Founded in 1979, Strategic is a leading investment and wealth management firm managing and advising on client assets of over $1.8 billion.