One way to beat the benchmarks is simply to decline less during downdrafts like yesterday as well as during serious bear markets. This can be done by how you mix different asset classes in your portfolio and by keeping losses from spiraling.
One way to do the latter is to use trailing stops.
Here are some real examples from our model portfolio that protected us in the Oct 10 decline.
In our Growth and Value model portfolio, which I have steadfastly maintained for 20 years, I discuss every purchase or sale so those who see it can go back and re-visit what I was saying and, more importantly, doing at any given time. Transparency counts. Honesty counts.
Because we are closer to the end of this bull cycle than the beginning, I have been reshaping the portfolio this year for protection even if that means we make a little less – but protect what we have made.
Here were my comments to subscribers after the market closed yesterday…
MY POSITIONING 10 OCTOBER WITH THE DOW DOWN 831
I will take a look at how the markets respond to today over the next couple days. If I conclude we need to continue or shift to value we’ll do so. But as I said in a letter to clients today, even the one-day 22% decline of October 19,1987 didn’t change the market direction. (And that was 22% in one day, nearly 7 “times” as big as today’s decline.) That’s right, in 1987 the market finished the year up.
No one knows if something similar will happen this time around. I stand by my oft-stated conviction that October will continue to be volatile, mostly because of the stakes of the upcoming mid-term elections — now just three weeks away.
If the House and Senate remain committed to the pro-business and reduced regulatory burden policies of the current administration I imagine today’s market action will be seen as just a scary, and not long remembered, day. If the balance of power shifts… we’ll have to cross a different bridge.
