Investing in a Volatile Environment

The volatility that we recently experienced in the market is very troubling to some investors. Unfortunately, those investors who hit the panic button and sold off are recognizing large losses in their portfolios only to turn to investments that are perceived as safer places to invest.

The fact of the matter is that we invest our money to earn long-term rates of return that will exceed the rate of inflation and help us preserve our purchasing power. Historically, cash has been the worst place to invest over the long term.

Losing Investment Capital in a Volatile Market
According to Fidelity Investments, investors who sold their 401(k) holdings while the market was crashing between October 2017 and March 2018, and then stayed on the sidelines, have only seen their account values increase by about 2%, including contributions, through June of 2019. This compares with those who held on and saw account balances bounce back by around 50%. During periods of extreme volatility, wealth managers will often tell clients to stay invested rather than sell and lock in large losses in a seesaw market.

Building confidence in your strategy is a way to keep from making the mistake of buying high and selling low. Having the mental conviction to tell yourself that you have a carefully planned portfolio of high quality investments goes a long way toward getting through the toughest days of market volatility. If you are unsure of how to select high quality investments, consult with an financial manager or registered investment advisor.

The question is; how do you reach that state of mind? It's not easy if you are the type of person that tends to get knots in your stomach when the market drops. We outline some steps below that might be able to increase your level of confidence.

Conquering the Fear of Volatility
One step you should take to better handle volatility is to make sure you have adequate cash reserves for a financial emergency that might arise. This way you are not depending on your portfolio for unforeseen expenses and your anxiety level will be lower, knowing that you don't need to sell your investments when they have declined in value.

Make sure you have a mix of investments that fits in to your risk tolerance and time frame. This can be accomplished by considering how you have felt when past market declines have occurred. Your wealth management advisor should be able to provide you with a thought provoking questionnaire that will give you a score when completed. The score on the questionnaire will have a corresponding asset allocation that you can use to determine the split you will have between stocks, bonds and cash.

Once your allocation has been determined, stick with it. It is a good practice to reallocate your assets on a regular basis to keep your risk level the same. This means that a portion of those investments with better performance will be sold (sell high) to purchase in order to purchase shares in those that have not performed as well (buy low).

Other ways to hedge volatility can be through the use of options. Two simple strategies can be applied. One is the sale of covered call options against underlying stock or ETF positions. In this strategy you (the seller of the option) collect money from a speculator (the buyer of the option) in exchange for an agreement to sell your stock only if it reaches a specified price (higher than where it trades at the time of the transaction). The option must hit the price target (strike price) within a predetermined time frame (expiration date). If it does not, the contract expires you keep the money paid and are free to sell more options against that stock position.

The other strategy is to simply buy a put option. This gives you the right to sell your position in a stock or ETF that you own at a predetermined price within a predetermined time frame. For this privilege you will pay money (a premium) to the potential buyer (seller of the put option) of your stock. This strategy should be implemented in periods of low volatility, as the cost of the transaction will rise as markets begin to fall.

Buy With Conviction
Let's say you've owned a stock that has done well over time. The stock has had a history of increasing revenue, profits and dividend increases. It seems like the stock is usually going up when the market goes up, only now there has been a big selloff in the market, and the stock has dropped dramatically due to market conditions. It may be time to do some homework on the company and make sure that the drop is due to just a generally bad market. If it that turns out to be the case, maybe it is time to buy more of the stock. Great companies often go on sale in market declines, only to have dramatic upturns once the market decline is over.

Speak With Your Wealth Management Team
You should also consult with your financial manager when markets are volatile. Investment professionals are in the business of understanding what is causing the market volatility and can often provide some insight. Often times your investment professional can help ease your anxiety and remind you of your commitment to your allocation and financial goals.

Article Source: http://EzineArticles.com/10203136

AIG, Private Equity and Venture Capital

AIG: Maurice Greenberg's piece in today's Wall Street Journal nearly provoked an attack of apoplexy. I'm not sure if I've read such a slanted, self-serving editorial in a long, long time. I'm pretty shocked that the WSJ would publish such pandering drivel. Be that as it may, we all know that the Big Mo controls gobs of AIG shares both directly and through his management of CV Starr, so let's just say that we know where he is coming from. When he starts out with the bailout-inconsistency argument, he kind of had my ear. But when he went on to praise the Citigroup package while chastizing the AIG deal, I couldn't help but call bull$hit.

To date, the government has shown everything but a consistent approach. It didn't give assistance to Lehman Brothers. But it did push for a much-publicized and now abandoned plan to purchase troubled assets. The government also pushed for a punitive program for American International Group (AIG) that benefits only the company's credit default swap counterparties. And it is now purchasing redeemable, nonvoting preferred stock in some of the nation's largest banks.

The Citi deal makes sense in many respects. The government will inject $20 billion into the company and act as a guarantor of 90% of losses stemming from $306 billion in toxic assets. In return, the government will receive $27 billion of preferred shares paying an 8% dividend and warrants, giving the government a potential equity interest in Citi of up to about 8%. The Citi board should be congratulated for insisting on a deal that both preserves jobs and benefits taxpayers.

But the government's strategy for Citi differs markedly from its initial response to the first companies to experience liquidity crises. One of those companies was AIG, the company I led for many years.

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The maintenance of the status quo will result in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and millions of other ordinary Americans. This is not what the broader economy needs. It is a lose-lose proposition for everyone but AIG's credit default swap counterparties, who will be made whole under the new deal.
The government should instead apply the same principles it is applying to Citigroup to create a win-win situation for AIG and its stakeholders. First and foremost, the government should provide a federal guaranty to meet AIG's counterparty collateral requirements, which have consumed the vast majority of the government-provided funding to date.

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The purpose of any federal assistance should be to preserve jobs and allow private capital to take the place of government once private capital becomes available. The structure of the current AIG-government deal makes that impossible.

The role of government should not be to force a company out of business, but rather to help it stay in business so that it can continue to be a taxpayer and an employer. This requires revisiting the terms of the federal government's assistance to AIG to avoid that company's breakup and the devastating consequences that would follow.
Hank, you've got to be kidding me. The U.S. taxpayers saved Citigroup's life, and for that we may get up to 8% of the company. THAT is called a "punitive program" in Hank's parlance for the U.S. taxpayer. In my world when you save a company you own ALL the equity, not 1/12th of the equity. The fact that the taxpayer gets up to 80% of AIG - now that starts to make sense. I agree with the Big Mo's contention that "The purpose of any federal assistance should be to preserve jobs and allow private capital to take the place of government once private capital becomes available." But that has nothing to do with post-restructuring equity ownership. He then pulls on the heartstrings by saying "The maintenance of the status quo will result in the loss of tens of thousands of jobs, lock in billions of dollars of losses for pension funds that are significant AIG shareholders, and wipe out the savings of retirees and millions of other ordinary Americans." Well, Hank, that is 100% on you. YOU should have thought things through before building a company and a culture that gambled it all - and lost. You tell that retiree, that pensioner how you screwed them. That's called integrity. This thinly-veiled call for personally getting bailed out is both insulting and offensive. And I'm not buying it. I'm sure that my fellow U.S. taxpayers aren't, either.

Private Equity: The daisy chain of secondary sales of PE L.P. interests will almost certainly accelerate. It is one of those slow-motion train wrecks that is painful to watch. The calculus is easy to understand: public equity values plummet, PE values are stickier and fall more slowly, PE as a percentage of overall assets rises to unacceptable levels, precipitating a wave of sales of PE L.P. interests. An interesting feature of this dynamic is autocorrelation, where PE values are slow to adjust notwithstanding the public market comparables that are available. If industrials are down 40%, then don't you think a portfolio of PE holdings in the industrials sector should trade well beyond 40% down due to illiquidity? This isn't the way many PE funds choose to see the world, however. Regardless, the secondary market is just that - a market - and the discounts being placed on marquee funds like KKR and Terra Firma reflect this reality. Pensions and endowments have to dump stuff, and are trying to do so at a fraction of their basis. But even at fire-sale prices it is hard to move the merchandise. In the next few months we'll see just how desperate these investors are. Might we see KKR trade at 30 cents on the dollar? It's possible. And frightening.

Venture Capital: I attended an interesting brownbag today with my pals at betaworks. A big part of the discussion was around funding in today's hostile environment. Here are a few of the tidbits that came out of the dialogue:

1. Be prepared to live with your current investment syndicate.
2. If possible, have a deep pocketed investor as part of your syndicate.
3. Raise 18-24 months of capital, no less. This can be done through a combination of capital raised plus a reduction of operating burn.
4. Restructurings are getting ugly. Investors, whether inside or outside, are demanding both haircuts from the last round plus and a priority return of capital such that they are fully repaid before anyone else gets anything. Looks, smells and feels like a cram down. This is why having 24 months of capital in the bank upfront is so important.
5. In these down times coalitions get formed between Management and New investors vs. Old investors. This mis-alignment of interests can lead to gridlock and push a company to the brink.

There was much more but these were the high points. Even with today's difficulties there was still a lot of excitement about new companies and new ideas, with the confidence that money would come to those that truly deserve it. In short, there's hope.

Article Source: http://EzineArticles.com/10204936