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Nowhere to Run


Dr. Paul White

November, 30, 2023 - read

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 Bloomberg Markets The European Close with Guy Johnson and Alix Steel on 11/24/2003

Bloomberg Markets The European Close with Guy Johnson and Alix Steel on 11/24/2003

“I know you're no good for me, But free of you I'll never be”
Nowhere To Run by Matha and the Vandellas

Money market funds have seen an increase in assets over the past year from $4.8 billion to $5.8 billion.  This is generally interpreted as move to cash by investors.  Prior to the hiking of interest rates by the Fed, this was seen as a sub-optimal move since interest rates hovered near zero.  Now with interest rates at a recent all-time high, is this still sub-optimal? 

Trinary Capital has made the point before that getting out of the market really involves two decisions:

  1. When to get out of the markets
  2. When to go back into the markets

It sounds pedantic, but it really is true.  Market timing is the ultimate skill, which none of us have mastered to any serious degree.  There is ample evidence to suggest that hedge funds, VC’s, and private equity firms at large do not either unless highly specialized1.  Though these ‘market wizards’ advertise their prowess in order to justify such high fees, there is growing evidence that these fees may not be warranted given the returns an investor will realize.  Nowhere to run is true for everyone in the market.

Running to cash may put investors into such a quandary: when, if ever, do I start investing again?  We want to be clear that investing involves risk, and it’s something that must be accepted.  Mitigating the downside may be very expensive depending on what choices are made to achieve it.  Mitigating risk almost always involves both the upside and downside risk nearly always asymmetrically.  That is, mitigating 20% of the downside risk might cost 80% of the upside risk.

Another sobering point is that sitting out of the market this year would have meant an opportunity cost of 18%. To be fair, this could have just avoided a loss of –18%, but investors can have asymmetric responses to these situations.  But, right now, today, it would have cost 18%.  How does that make an investor who sat out this year feel?  This is the reason why it makes sense to gauge one’s risk tolerance by looking at losses as opposed to gains, which is why Trinary Capital has put this into chart form (Strategies - Trinary Capital).  We can’t say how much pain will be in the future, but this is how bad it has been in the past.Diversification is the first step to alleviating the pain in the markets.  This is recognized in almost every investment house by the fact that most allocation involves not just stocks, but stocks and bonds, and why we recommend stocks, bonds, and alternatives.  Getting in and out of the markets on one’s own can cost more than what an individual investor can afford to lose.  The pain of loss might be gone, but that comes at the cost of the joy of gain.

 

1 Eric Ball, Hsin Hui Chiu, Richard Smith, Can VCs Time the Market? An Analysis of Exit Choice for Venture-backed Firms, The Review of Financial Studies, Volume 24, Issue 9, September 2011, Pages 3105–3138, https://doi.org/10.1093/rfs/hhr042

Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Please remember to always speak with your individual advisor before making any investment decisions.

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Past performance is not indicative of future results. Remember, there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investment strategies discussed in this article) will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Remember to always speak with your individual advisor before making any investment decisions.