rogernusbaum

Nassim Taleb is quoted as saying "to understand how something works, figure out how to break it." The Coronavirus has broken a lot of things for us and we now need to figure out how to adapt to the way we're living now (sheltering in place) and how we might have to adapt when the pandemic and the extreme measures we are now taking subside. Note that I am not saying when things return back to normal as some things will change, more specifically the way we do some things will change. I don't know if a lot will change or just a little but some things for sure.

This is not about predicting gloom, it is about being better prepared for whatever might come in hopes of minimizing the disruption that change might cause. A low leverage example is if your gym goes out of business, low leverage for you anyway. I post frequently on social media about working out and how even just pushups and a jump rope can go a long way to maintaining a decent level of fitness. I've mentioned before that we have some dumbbells at the firehouse and that between what we have there plus my jump rope, pushups and dips I've been able to get a pretty good work out. If my gym fails, I need to get a few more dumbbells, get the bench out from behind Brush 83 (one of our trucks at the station) and do a little research on a few other exercises to do.

There's visibility of the problem, the gym might close, and how I would adapt if it does close.

I heard from a friend who runs a small insurance agency and he has to grapple with the possibility of laying some people off. He's trying to access the loans through the CARES act and the SBA, we all know it's a quagmire that will end up dissuading some people from following through (not saying that about my friend, I have no idea). His business won't go under, people still need insurance but there is visibility of a problem, having to figure out how to get the same work done by anyone who ends up getting laid off, not to mention the stress of having to lay someone off. He'll figure something out because he has to, but hopefully he is starting to figure all of this out now before it gets to that point, not after.

We all have the time now to assess the various aspects of our lives, determine what potential disruptions loom for these life aspects and can start to figure out how to mitigate those disruptions. My income will go down some with the drop in the market and our Airbnb will have fewer bookings for a few months although we still have few bookings. Mitigating this is simple even if not easy, we will save less money this year and not take any sort of big trip this year, we'll still drive up to the Grand Canyon in October which is a cheap couple of days.

What about your investment portfolio? Have you learned the hard way that your portfolio is suboptimal in one way or another? Suboptimal could be just in terms of your tolerances, a 100% allocation to equities that has fared worse than the broad market during this event can still be valid and will retake its highwater mark eventually. When the stock market's volatility escalates to the point of being frantic like it has been, I want client portfolios to be less volatile than the market. If that is working that means that the portfolio is down less on down days and up less on up days. There are no absolutes of course but if that is the case more often than not, then things are working as hoped for.

One issue with this panic has been that certain parts of the bond market have been disrupted. Many investors own bonds, or other fixed income sectors, to help manage stock market volatility but that hasn't necessarily worked this go around. There were plenty of fixed income funds that during what has been the worst (so far?) of this crash were down 20%. They didn't stay down that much for long but someone sold at the level on the day or two they were down that much and before they started to snap back.

The market segment that has held up the best (as far as I know) has been alternative strategies. This is a drum I've been banging since before the financial crisis and before they were called alternatives. The four in this chart are ones I've been writing about for varying amounts of time (GLD for 15 years and BTAL for two years) and are in my ownership universe. They do not do what I would hope every single day but they do what I would hope far more often than not. The chart goes back to the high.

I do not discount the possibility that these were just lucky picks because there are plenty of alt funds that are down a lot but for my money, literally, these make a lot of sense to me as a means to diversify and by diversify I mean manage volatility. Human nature being what it is, on the way down you never have enough of these and on the way up you have too much. I'm very comfortable holding these as I believe they add value over the course of the entire stock market cycle and by add value I mean help manage volatility. But you have to understand the drawbacks. If Monday was day one of a 30% rip, then any diversifier you could choose should be expected to lag. In theory, something like gold could go up 30% along with the stock market but there should be no expectation it would. With equities up that much I might expect gold to go down a little. If you understand that and can think in terms of years not days then you'll be less likely to be impatient.

Tying this altogether, if the problem is discomfort with volatility then small doses of effective diversifiers can be a way to fix it before it breaks which is what I hope I've done by adding these funds before the crash happened.