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Managing Risk In a Booming Growth Market

Historically, value stocks have outperformed growth stocks; a research bulletin from MSCI titled The Shift From Value to Growth Around the World notes that from 1978 to 2007, the MSCI World Value Index outperformed the MSCI World Growth Index by nearly 3% per year.

Over the past ten years, however, growth stocks have vastly outperformed value stocks. Since 2009, the MSCI World Value Index has seen an average annual return of 8.04%[1] – lower than the broader MSCI World Index (9.81%) and well below the average return of the MSCI World Growth Index of 11.55%.[2] As a result, individual and institutional investors are pouring money into growth stocks, ignoring decades of evidence that high-growth, speculative stocks can be risky long-term investments.

This new-found interest in growth stocks doesn’t mean that investors are suddenly more comfortable with risk; rather, it’s likely the result of what’s known as “recency bias.” When calculating the likelihood of something happening in the future, it’s human nature to overvalue whatever happened most recently – even if that event is an outlier.

Recency bias is one of the reasons why companies like Beyond Meat, cannabis stocks, and cryptocurrencies have dominated news cycles despite lacking strong fundamentals: they’ve performed well recently, so investors assume they’ll continue to perform well in the future.

But responsible wealth management isn’t about finding the asset du jour – it’s about building a strong financial plan to meet your investment goals while avoiding unnecessary market risk. The question is, how do you know if the amount of risk in your portfolio is excessive? We can help answer that question.

 

Measuring Your Market Risk

Financial planning software has made significant strides in recent years. Previous iterations of this technology were less powerful than they are now, which limited the number of factors that could be taken into account when measuring market risk. Today, however, we can measure the amount of market risk within your portfolio with more precision than ever before.

As an independent wealth manager, we can use any technology that we see fit to support our work. Over the last year, we’ve adopted and implemented a new financial planning platform that allows us to understand the risks that our clients face in new ways.

 

How It Works

We analyze each individual client portfolio and calculate the level of risk they are currently taking and also look at a variety of what-if scenarios. Traditional forecasting relied heavily on the historical performance of a stock or industry to gauge how that stock might perform in the future, but our financial planning process incorporates data from a much larger set of possibilities and factors, resulting in more in-depth modeling. Though there are no guarantees, this allows us to show clients how their portfolio would likely perform during future events, such as another 2008-type market correction, an escalated trade war with China, or a surprise Fed rate increase.

We also use this technology to understand how positive market moves could impact client portfolios, such as the S&P 500 going up 10% next year, the Fed cutting rates in Q4 2019, or a positive resolution to Brexit in 2020. In all, our goal is to prepare client portfolios for macroeconomic events and help them reach their goal regardless of the market performance.

This is about more than forecasting though; it’s about understanding how your portfolio is allocated and identifying the unknown correlations that exist between individual assets and asset classes. With this data and insight, our team can build portfolios that more closely align with your unique risk profile and your long-term financial goals.

[1] MSCI, MSCI World Value Index (USD) (link)

[2] MSCI, MSCI World Growth Index (USD) (link)

 

ABOUT THE AUTHOR: Edward “Eddie” Ambrose

Eddie co-founded Sound View Wealth Advisors with the goal of operating as a fiduciary, where he is able to put clients’ interests first and foremost. Eddie develops and implements tailored financial plans that encompass estate planning, investment management and overall risk mitigation for families.

Prior to Sound View Wealth Advisors, Eddie was a Senior Financial Advisor with the Bouchillon, Ham & Dekle Group at Merrill Lynch, which he joined in 2011. Previously, he served ten years as a financial services policy advisor to members of the United States Congress, as well as several major investment banks, private equity groups and private investment funds. He earned an M.B.A. in finance from the Robert Smith School of Business at the University of Maryland.

Eddie serves on the board of directors for the Humane Society of Greater Savannah. In college, he was captain of the men’s varsity golf team and earned Academic All-American honors. His interest in golf continues today through his involvement with the Landings Men’s Golf Association (LMGA).  Eddie resides on Skidaway Island with his wife, Caroline.

 

Disclaimer: The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. All investments carry a certain risk, and there is no assurance that an investment will provide positive performance over any period of time. An investor may experience loss of principal. Investment decisions should always be made based on the investor’s specific financial needs and objectives, goals, time horizon, and risk tolerance. The asset classes and/or investment strategies described may not be suitable for all investors and investors should consult with an investment advisor to determine the appropriate investment strategy. Information obtained from third party sources are believed to be reliable but not guaranteed. Sound View Wealth Advisors Group, LLC makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice.