I have found myself in the middle of one of the most interesting gatherings I’ve been to in years. I’m in Tennessee, among about 90 self-selected money managers, risk managers and market analysts talking about, well, financial markets and risk. But the discussions are from a much higher level than asset allocations and strategies. The changes that have taken place in financial markets since 2009 have been the main topic of discussion. With the pandemic, its aftermath and the first war on European soil in well over half a century, the acceleration of the rate of change in the last three years has been striking.
Here’s just one of the interesting things I heard this morning (and it lines up with some of the others, as often happens). We’ll start with some numbers from Gallup. They’ve been tracking ownership of stocks since 1998. During the Great Recession (2008-2009), Americans fled the stock market. No surprise there. But the amount of time that they stayed away from stocks is the surprising thing. Here’s the chart, and then some commentary:
It took a full 15 years to get back to the pre-Great Recession level of stock ownership which was already down from the 2004 peak. People were slow to get out after the dot.com bust, but they dashed out after the 2008-2009 financial crisis. Then, despite one of the longest and strongest bull markets of the past 100 years, people have been slow to re-enter. Which brings me to the best discussion I had this morning. This working conference features lots of big-thinking brainiacs who are presenting some points of view in small groups and then looking for feedback and solutions.
A 15-year veteran of a household name in the investment banking world has gone independent. In the last three years, he started a firm that specializes in using sophisticated and specifically tailored option strategies to reduce portfolio risk for small money managers. He shared some general data with a friend and me about a long-term study his firm did that shows that only about a third of the long-term gains in a portfolio come from pure risk reduction activities. The other 2/3 of the gains come from the re-investment—how managers got back in!
With that thought in mind, look at the above Gallup poll with fresh eyes. If getting back in or re-deployment (what Van always called re-entry in trading language) accounts for 2/3 of gains in the crazy markets of the last 14 years, think about how much opportunity has been lost by those sitting on the sidelines for years on end.
So What?
There are two big takeaways I’ve gotten from the conference participants in just the first morning. Whether you consider yourself a trader or an investor (or a bit of both), here are those two keys:
- The financial markets have structurally changed over the past 14 years. Our approach to investing and trading must change with it. Van and RJ Hixson have taught for decades that there is no one investing strategy or trading system that fits all market conditions. And, market conditions are changing more radically and quicker than they ever have.
- One particular element of investing and trading is more important than it ever has been. Re-entry in trading or asset re-deployment in investing is now taking a more central role than ever in system development. And those who don’t have a well-thought-out plan for getting back in are seeing their performance lag.
Another jarring chart brings this re-entry/re-deployment thought to the front of mind. The U.S. indexes have seen a strong recovery over the past eight months. But according to Bank of America Global Research, cumulative equity inflows have been flat for an extended time.
As always, past indications are no guarantee of any next move, but this extended flattening of flows could be a precursor to a market pullback, especially after Mega Tech and AI stocks have been on such a tear higher. Why even mention this? After such a strong move, there are always pullbacks:
The simple question is this. If we get an extended pullback (as likely or unlikely as that is), are you ready now to re-deploy capital?
As an investor and/or trader, where are you in developing your “price discipline”—your beliefs about markets and, more importantly, how you act on them at any given time? Because I only get to check out RJ Hixson teaching the Systems Development workshop every once in a while (and it’s coming up in June), I hope you can join us. I may even find some additional thoughts from this high-powered body that I can share with you.
What are you currently using for your re-entry or asset re-deployment strategies? I’d love to hear about them. Send me those thoughts, or any about system development in general, to drbarton “at” vantharp.com.
Great trading and God bless you,
D. R. Barton, Jr.