And not by over trading

For most professional investors, managing risk means trading. Generally, that means selling something that has some potential for loss and buying something else that has a lesser chance of loss. For example—sell expensive growth stocks and buy bonds. 

On its face, that makes sense. If the market falls, this trade is likely to pay off immediately by avoiding a loss. But what kind of loss are we talking about? A temporary loss, or a permanent loss? The distinction is incredibly important.

That’s because when you have a longer time horizon for your investment decisions, you need to make sure you own the assets that can compound at high rates for a long time. The assets that are safer in the near term are often the ones that carry a long-term risk—the risk of not growing fast enough. 

Most of the time the market recognizes that profitable growth companies are valuable—the stock prices for these companies are rarely cheap. In fact, they tend to be more expensive than the average stock. 

These expensive stocks tend to underperform in down markets. Everything gets sold, but expensive stocks tend to get sold disproportionately, as professional investors “manage risk” in the manner previously mentioned.

But what happens when the downtrend is ending? Investors tend to buy things that are clearly valuable.

And that’s why profitable growth stocks do disproportionately well when markets recover. When emotions calm down, and cooler heads start to prevail, the stocks with the greatest likelihood of growing quickly are a good place to start deploying capital again. 

Now you may think “I can just buy them back on the way back up” and maybe you can. But in practice, that’s harder than it seems because on the way back up it won’t be easy to buy. They will rally quickly. You will think you “missed” the rally, and wait for lower prices that may never come again. Plus the news is likely to be bad during the rally and it will be uncomfortable to get back into the market.

While it’s not easy to buy and hold these companies (it can be quite painful, in fact), it’s still the best way to make sure you own the right kinds of stocks for the best long-term outcome. 

 

Best regards,

Evan McGoff

 

Performance Disclaimer: 

Past performance is not a guarantee of future performance. Actual performance achieved was higher or lower for each client. Performance figures for a typical portfolio are in the table above labeled “Balanced Portfolio.”

 

Dock Street Equity – Equity positions which are the primary equity holdings of Dock Street clients and are oriented towards long term growth. Performance is shown inclusive of dividends.

Dock Street Fixed Income – Holdings in Bonds may include Treasuries, ETFs, and Mutual Funds. 

Cash & Equivalents – Holdings in custodial cash, money market funds, floating rate ETFs and other cash sweep vehicles.

Balanced Portfolio – The performance of a typical Dock Street portfolio comprised of a mix of Equity, Fixed Income and Cash investments. Presented inclusive of interest and dividends and net of fees.

S&P 500 – The performance of the S&P 500 index inclusive of dividends. Fees are not included so this performance is not available to the typical investor.