Strategies To Avert An Earnings Cliff
As investors keep an eye on the future possibility of an earnings cliff, they can position themselves to take an active, risk management approach to help minimize the risks of going “over the edge.” The following are a few principles they can follow to keep client portfolios on a safer path.
- Monitor Risk, Not the Market: For investors, what matters most is watching the economic landscape, not just what the stock market is doing. This starts with a macroeconomic analysis of the forces, themes and risks that define and inform global capital markets. Through this process, one should monitor risk factors, including national production, personal income, employment, interest rates, political instability, monetary trends, commodity prices, housing, stock market volatility and consumer confidence, to name a few. Based on this analysis, investors can better understand and anticipate the movements of stock and commodity prices, interest rates and business cycles.
- Do Your Homework: Due diligence doesn’t stop once investors have identified targeted sectors and industries as potential investment opportunities. From there, they need to vet out the most compelling security selections based on an individual company’s balance sheet, earnings growth, yield, valuation (price to earnings, price to book value, price to sales), management expertise, and franchise value in selecting securities within targeted industries.
- Consider Cash As An Asset Class: The prudent use of tactical cash as an asset class holds potential to smooth out return patterns, providing protection from capital loss and meaningful participation in equity market advances at the start of directional change. In fact, cash positions within a “long-cash” strategy can significantly reduce the risk of loss of investment capital during market downturns.
- The Value Of Meaningful Diversification: Investors can take a meaningful approach to diversification by incorporating the principles described above into their investment planning. With precise attention to risks, investors can seek growth and income opportunities across a variety of targeted industries and asset classes, including the relative safety of cash when risk indicators signal an elevated potential for loss.
As current budget negotiations move forward, investors may not be able to breathe a sigh of relief for the foreseeable future. However, by following sound investment principles, they can stay the course to avoid loss and maximize a risk-adjusted return even within a questionable earnings environment.
About the Author:
A former SEC attorney and chief investment officer at L&S Advisors, Rick Scott brings more than 30 years of expertise in portfolio management to his firm L&S Advisors, which he co-founded with CEO Sy Lippman. As a fiduciary for high-net worth clientele, L&S Advisors employs a tactical, active investment strategy that is guided by the firm’s proprietary risk management methodology and philosophy. L&S Advisors is an independent, fee-only registered investment advisor (RIA) dedicated to managing assets for high-net-worth individuals and families as well as institutional accounts, endowments and family offices.