Why Many Investors Should Be Hedged Right Now

Late 2020 is the wrong time to be too aggressive

Finally, some good news in 2020! What’s that good news? It will be over in 3 months.

However, during that time, any investor who views their portfolio as a nest egg rather than a “very long-term growth investment” needs to take account of the surroundings.

The good stuff

The Fed has everyone’s back. If you are a broken-down, highly-leveraged public company that should by all rights be defaulting on its debt, the Fed has your back. If you are a big Wall Street institution, wondering if your big clients will ever repay their gigantic loans, the Fed has your back. If you are a stock market investor that has ridden the wave of low interest rates, in large part because we all know the economy would be helpless without them, the Fed has your back.

The bad stuff

The economy just gained 10 million jobs, but that was only because it lost 30 million first. That’s just one example of what appears to be a strong rebound that is not sustainable. The stock market is blowing that off (see “Fed has everyone’s back” above). The bond market is stagnant. And market swings are just that – swings. They have not really led to anywhere lately.

That’s what happens in a bear market. You think you are making progress in your stock portfolio, and then you realize that you remembered the gains but conveniently forgot the losses. It’s human nature.

The tech sector is still sky-high from a valuation standpoint. The Nasdaq’sNDAQ-3.2% P/E Ratio is at the level where the risk outweighs the reward. Speculation is rampant. IPOs, Dave Portnoy, etc. It may not be as severe as the Dot-Com Bubble, but that could just be because our digital lives make us so much more aware of everything around us now.

In the year 2000, the Nasdaq crash was a big shock, in part because news didn’t travel so fast, and investors didn’t know what they owned, since mutual funds and not ETFs were the popular form of investment for the mainstream (mutual funds don’t disclose their holdings every day, but ETFs do).

The strategy

There is always reward and there is always risk. It just seems to us that the risk today is higher than usual. That means that any investor who is close to having what they need to retire should be gut-checking their portfolio.

Specifically, you should be identifying areas of severe risk. You should be seeing if you own any “dead weight” in your portfolio (many types of bonds and bond funds are a good example). And you should resist the air of “excitement” that seems to exist around investing in 2020. Just because we have less to do (thanks, pandemic), that doesn’t mean that everything should turn into a sport.

Investing is not a sport. It’s a process-driven, risk-management-focused, lifelong learning pursuit. Markets of today challenge pros and layman alike. What a great time to get organized about how you invest, to protect yourself from whatever 2020 and beyond presents to us.

Related: What’s Coming For The S&P 500 In October