• Preferred stocks generally return less than common stocks, but with that comes about half of the volatility (as measured by standard deviation). However, preferred stocks still walk up the stairs and jump on the elevator down. During the last trading days of February, preferred stocks lost about 3%, also hitting our sell levels (and thereafter lurching down another 10% so far in March).
• High-yield corporate bonds also typically trend in the same direction as stocks, but with half or even a third the volatility of common stocks. Unlike the broad stock market, the high-yield corporate bond market has a much higher weighting towards energy companies. When Saudi Arabia boosted oil production earlier in March, energy prices lurched even further down pulling high-yield corporate bond prices with it. The rules-based process we follow, though, pushed out this asset class in the last days of February and first days of March (that asset class has also fallen another 8-10% since early March).
• As fear accelerated in the second week of March, a take no prisoners frenzy took over and even asset classes that are typically a safe place to hide were no longer providing protection. The prices for low volatility municipal bonds dipped enough to reach our sell signals with many registering high single digit percentages declines in just a few days.
Summarizing, an orderly sell discipline limited the impact from global equities, preferred stocks, high-yield corporate bonds and even municipal bonds in our portfolios and strategies.
So now what?
When It Comes Time To Buy, Will You?
We ask again, when it comes time to buy, will you? Will you really feel like buying when opportunity is at or as close to as good as it gets?
In other words: do you have a process and the discipline to follow it?
Human behavior and emotion are not useful substitutes for a disciplined process. Conversely, emotions can be a massive threat to financial health, as the students of behavioral finance have studied and documented in Nobel Prize winning papers.
The familiar chart below says it all. Optimistically, investors expect to make money investing and when those expectations are met, excitement, thrill and buying reigns supreme and converts into further buying.
When lofty hopes of making money are thwarted, complacency and denial begin to set in. Facing a bear market, anxiety, fear and eventually panic result in widespread selling. Sometime during the panic and eventual despondence the cycle of emotions produces maximum financial opportunity.