What to Do When an Unstoppable Market Hits a Wall of Worry?

Hilary Kramer

Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street.

Many investors may be wondering “What to Do When an Unstoppable Market Hits a Wall of Worry?”

We’d all have a smoother market ride and probably capture better lifetime outcomes if every investor could digest just one bullet point from my MoneyShow seminar this morning. Think back to all the shocks we have weathered during the past 60 months: trade wars, a yield curve inversion, endless partisan division, the worst medical crisis in a century and a whirlwind recession. You’d think all those obstacles would leave stocks underwater, right?

As it turns out, the S&P 500 delivered double its historical average annualized return in that five-year period. Investors with the fortitude to buy in mid-2016 and hold on through every wall of worry saw their money work harder than in previous generations.

We can’t predict the future until it comes. But unless the headlines ahead get an order of magnitude gloomier than what we have already survived, I am confident that American companies will find a way to keep the cash flowing.

If anything, we seem to be getting better at coping with crises and getting on with life. Corporate response cycles haven’t gotten fragile or brittle. They’re faster and more efficient than ever.

As investors, all we need to do is fasten our belts and keep our eyes on the long horizon. We’ll get there. The only question is how fast and wild we want our journey to get.

What to Do When an Unstoppable Market Hits a Wall of Worry? Keep Beating Each Crisis

Another of the slides in my presentation compared last year’s COVID-19 volatility spike to previous market upheavals. The biggest shock was the way events that feel like the end of the world quickly get forgotten as Wall Street returns to work.

Remember the Treasury credit downgrade of 2014? The global currency crash of 1997? The S&L crisis of 1990? Each spawned massive volatility and endless commentary. Today, all three are barely footnotes in the market’s long upward arc.

The current era will undoubtedly end in its own turmoil, triggered by developments we can barely even anticipate now. That’s all right. Unless some fundamental facet of human nature changes in the meantime, we’ll find a way over those future walls of worry.

We even saw this in the 2008 credit crunch. The short-term market numbers were apocalyptic. Everything failed.

The long-term averages shifted maybe 0.1 percentage point lower for a few months, then quickly recovered. The S&P 500 still rises 8-11% a year on a generational timeline, which is usually enough to double every 6-9 years.

History strongly suggests that the market will expand your wealth, provided you have decades to let the shocks settle. An S&P 500 index fund is “good enough” in that scenario.

But if you aren’t thinking that far ahead, aren’t satisfied with 8-11% a year, don’t have the nerve to ride out another pandemic-style shock or simply don’t have confidence in American innovation and grit, you need to make slightly more sophisticated choices.

What to Do When an Unstoppable Market Hits a Wall of Worry? Higher Risk, Higher Returns

While I’ve developed investment strategies around most of these exceptions, I can’t help you if you’ve lost faith in the American system. Feel free to tell me when you’ve found something better.

If you don’t relish the prospect of ever living through a 2020-style crisis ever again, a dividend-driven portfolio like Value Authority provides a smoother ride. The volatility won’t be as intense, and the speed bumps will be less painful.

Think of approaches like this as alternatives to bonds, only paying yields that have a better chance of keeping up with inflation. These aren’t the riskiest stocks in the market and their return profiles are relatively smooth.

On the other hand, value stocks have only delivered half the gains of growth stocks in this pandemic era. While many of my recommendations have done better than the benchmark, we’re still paying a price for peace of mind.

Maybe you want bigger return numbers. You’ll need to ride a more volatile rollercoaster in that scenario and trust the long-term trajectory to overcome month-to-month pain.

That’s why I created IPO Edge, where we reach for huge returns over roughly a one-year holding period. At this end of the market, you’re willing to take big paper losses to get a chance to lock in a bigger profit.

Some of our stocks in this portfolio leave us 20-30% below our buy price. They simply didn’t work out, just like some venture capital fund holdings end up failing.

But when you stack those missed swings against a swarm of 100-300% home runs, the score still is extremely compelling. My average exit on that portfolio is above 50%, counting winners and losers alike.

And remember, we rarely hang onto any position there beyond a year, so if you can handle the ride, the return compares favorably to the S&P 500 numbers I discussed earlier.

Maybe you don’t want to hang around for a year to hit the jackpot. Triple-Digit Trader is where we see the fastest annualized returns now.

It is high risk. You can lose everything on any given position and take weeks or months to recover. 

But when our money works in the right direction over there, the annualized return rates can hit five digits. The S&P 500 will never reach that speed. 

For most investors, that’s all right. However, if you have iron nerves and a need for speed, you probably aren’t willing to settle for 8% a year.

 

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