Going With the Flow in Life, Not Investing
Perkins Chief Investment Officer Gregory Kolb shares his equity market insights.
- For equity investors, “going with the flow” can lead to significant losses when momentum in the market suddenly shifts, as it did in December.
- To minimize this risk, we believe it is important to consider valuation, corporate leverage ratios and other fundamentals when investing.
- We also favor portfolio diversification and believe select pharmaceuticals, consumer staples and utilities could provide resilience in the face of economic weakness today.
A good friend once gave me some very helpful dating advice: “Just go with the flow.” You’ve found someone special. Now relax, accept things as they are and see what the other person wants to do. While this notion will be obvious to many people, it was perspective-changing for me. And happily so, as I am now more than 11 years into married life.
Going with the flow will not be found in finance textbooks. Perhaps it doesn’t sound technical enough. Momentum is probably the closest factor proxy. For many investors, it simply means buying what has been working. Financial market results at the end of 2018 demonstrate the risk to this approach. As the smoothly rising equity market suddenly became a sharply falling one, stocks in general were very weak and both non-U.S. and value outperformed.
Markets can turn on a dime and are unforgiving. Going with the flow can leave you nursing losses and wondering what happened. It is challenging, particularly in the circumstance, to keep emotions in check and thoughts clear. Investors would do well to better ground their approach instead of merely floating along with the recent trend.
We think one way to ground your investment approach is to consider the downside risk of an investment before the upside potential. How much money could be lost in a realistic negative scenario for the company? This approach can help during good times to identify and attempt to avoid the most sizeable drawdown risks. Conversely, in more bleak environments, having a clear view of realistic downside scenarios can provide the confidence to buy when the market is overwhelmed with selling.
Recent market turbulence also highlights the importance of maintaining a balanced portfolio. We favor portfolios with many different drivers of cash flows, book values and valuation multiples that underlie the individual securities held. Sustaining some losses is much more manageable in the context of a well-diversified portfolio where not all stocks are losing badly and, perhaps, (ideally) some are even gaining. We believe select pharmaceuticals, consumer staples and utilities can play a balancing role in portfolios today by offering resilience in the face of economic weakness.
To learn more about how Perkins’ views the risk of “going with the flow” in investing and how investors might take a viewpoint independent from the market, click here to read the full February 2019 Perkins CIO Outlook.
MSCI World ex USA Index℠ reflects the equity market performance of global developed markets, excluding the U.S.
MSCI World Growth Index℠ reflects the performance of growth stocks from global developed markets.
MSCI World Value Index℠ reflects the performance of value stocks from global developed markets.
S&P 500® Index reflects U.S. large-cap equity performance and represents broad U.S. equity market performance.
Index performance does not reflect the expenses of managing a portfolio as an index is unmanaged and not available for direct investment.
Perkins Investment Management LLC is a subsidiary of Janus Henderson Group plc and serves as the sub-adviser on certain products.