Penn Wealth Publishing

2018.11.04 Penn Wealth Report Vol 6 Issue 04

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penn Wealth publishing Subscription Information Penn Wealth Publishing 9393 West 110th Street 51 Corporate Woods Suite 500 Overland Park, KS 66210 This magazine is subject to copyright protection. All rights reserved. Penn Wealth Publishing, LLC. 4 PeNN Wealth RepoRt volume 6 issue 04 04 Nov 2018 Penn Wealth RePoRt Copyright 2018. All Rights Reserved. From the Editor/ We have seen this play out time and time again. The per- ma-bears, confident that a correction is just around the corner, blast their warnings month after month. Eventually, however, after being wrong for so long, even they begin to capitulate— if for no other reason than to avoid the further tarnishing of their reputation. And then, when the bears do finally begin to change their tune, the correction hits. The markets in October are a study in contrast. On Black Monday, 28 October 1929, the Dow lost 13% of its value. The next day, Black Tuesday, the index fell another 12%. I was sta- tioned at Davis Monthan AFB in Tucson back in October of 1987, but remember the jumbo headline above the fold on Tuesday the 20th: "Dow Plunges 508 Points in Panic..." That was a 22.6% one-day drop, which seems almost unfathomable. On 27 October 1997, shortly after I became a professional broker, the "mini-crash" hit, sending the Dow down over 7% in one day. Welcome to the business. In the twenty-one years since, I recall a number of unexpectedly dark days in the months of September and October, right up to the stink bomb that was October of 2018. Then there is the contrast. Historically, October serves as the "bear killer," as the markets prepare for the best six months of the year—November through April. True to form, the last two trading days of this October saw a nearly 600-point gain in the Dow. If history repeats itself, now is a great time to be invested. So, how do we handle this volatile, finicky, troublesome month? As always, the very first—and most critical—step is to make sure that we know what our personal risk tolerance number is, and that our portfolio is in sync with that num- ber. To be sure, this was an especially tricky October, as asset classes that normally move in opposite directions all moved down. Oil, US equities, foreign stocks, bonds, and commodi- ties all took it on the chin. Yes, even the most conservative allocation went down, but if our allocation was a good repre- sentation of our risk number, the losses were mitigated. Of course, cash did not go down in value. Which leads to another topic: the stop loss. Stop loss orders, which are designed to either protect your gains or limit your losses, can be tricky instruments. Say you have a big gain in a stock, which is currently trading at $20 per share. To protect your losses, you raise your stop to $18 per share. Over the weekend, a negative story on the company hits the wires, and the share price opens at $10 Monday morning. Your stop fills—at $10. Additionally, if you place stops on positions in your non-IRA accounts, you must take the tax consequences into consideration. That being said, we do not see the October volatility going away soon. Between interest rate hikes, trade wars, and a potentially split Congress, they are an excellent tool. We review our stops once per quarter and raise/change as needed. So, between understanding your risk level, making sure your allocation reflects that level, and placing protection on holdings, we are taking the emotions out of investing and leaving them where they belong—in the sensationalist head- lines of the mainstream media. MSH Michael S. Hazell editor in chief October: The danger of complacency and overreaction Fear of the unknown while in the midst of a market correction is often the catalyst for bad decisions. A few simple rules can strip emotions from the portfolio management equation.

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