During a conference call last week with the Investment Management and Research team of a national brokerage firm, the Chief Investment Officer was asked, “Did you anticipate the possibility of the extreme market conditions of 2020? If so, was there a fallback plan?” The reply was yes, but not the coronavirus specifically. Their diversified strategies protected their client’s assets. But did they? According to Capital Markets are Uncertain Complex Systems, published by the Center for Individualism in July, 2018,

While almost everything was losing value, corporate retirement plan managers claimed to be helpless to do anything about it. After all, the meltdown could not have been anticipated, and its effects were not controllable, right?

The investment industry’s so-called diversifiers didn’t work in 2008, and they didn’t work this month.

Only US government bonds do this well. There is a vast historical data set to prove it. Traditional investment managers do not use US government bonds to diversify risk assets because of perceived interest rate risk, or their economic forecasts.

While the underlying cause of this year’s stock market collapse could not have been predicted, the event could have been anticipated,

The data exists to discover this. If you have bad assumptions, the allocation will not behave as anticipated. Well reasoned assumptions should have modeled extreme ‘asymmetric correlation’ markets.

The Economic Way

In May 2018, the Center for Individualism revealed two reliable methods for reinforcing human immune systems, and for reinforcing human retirement plans. In How to Apply the Economic Way to Destress Your Life, Physically and Financially,

For everyone, a fat burning focus improves metabolism, body composition, immune systems, and a sense of vitality. Using the heart rate monitor to maintain a mostly comfortable energy zone will help you live the one life you have to its fullest.

The economic way simply means having a vision, taking calculated risks, and avoiding mistakes. In order to understand how fitness and finance are related,

A no pain no gain mindset, and high intensity interval training, are probably bad decisions for most people. In personal finance, bad decisions involve maximum risk tolerance, economic forecasts, faulty return projections, beating the market, and staying the course.

For both, the essential element is an objective, forward-looking performance measurement system, and its called a Stress Test,

The heart rate monitor is a tool to that helps the user find the optimal energy zone for long-term health and vitality. Likewise, the Monte Carlo simulator is a tool that will help the user find the optimal confidence level for realizing priorities.

As human beings with active minds, we are learning and adapting to the reality of the Wuhan virus. One of its most advertised concepts is known as “flattening the curve.” In simple terms, it means lowering the probability of mass infection.

In a normal distribution, known as a bell curve, extremely low and high numbers of infections would be the tail ends of the curve, and called outlier events. But in this case, the horizontal axis of the graph is the number of days since infections began. Lowering the height of this curve means fewer peak hospital caseloads. Conveniently, this is important because hospital capacity has been squelched by decades of government regulations.

In stock market statistics, the horizontal axis is standard deviation (volatility), and illustrates the probability of extreme market events. These are also more frequent because of government policy.

The economic way for personal finance means controlling what we can control (for the Wuhan virus – hygiene and distancing), and model future cash flow needs against the uncertainty of the future. By using reliable data sets (which don’t exist for influenza or the Wuhan virus), we can anticipate the possibility of these outlier events, and manage the load.

Dear Uncle Bernie

Who is Uncle Bernie you ask? He is a metaphor for two living Bernie’s – Madoff and Sanders.

The former is a euphemism for hubristic market strategists who are in the business of being smarter than free markets, and its price discovery. The latter is a euphemism for heavy-handed policy makers who are in the business of controlling human economic activity, and doing the real looting. The two of them are connected at the hip; both avoid the reality of Ludwig von Mises’ Human Action and Friedrich Hayek‘s Knowledge Problem.

In contrast, this message was sent on March 13th to the clients of an American registered investment advisory practice. Their advice and service model is focused on their clients living the one life they have to the fullest, not trying to control or beat the market,

• As you’ve heard in many news media outlets, the coronavirus is the biggest story of 2020. You’ve also heard that the US stock market has lost significant value at the same time.
• While the number of people infected with COVID 19, on a global basis, continues to increase, and the value of stocks worldwide have decreased, it is important to keep things in perspective. On May 26, 2019, the S & P 500 US stock index closed at 2852, its current price. This means US stocks have lost what they earned over the last nine months.
• At Poetic Justice Capital Management, we anticipated this. We did not predict it because we don’t make predictions. Instead, we anticipate the possibility of extreme market events, and prepare in advance. This market was included in our random simulations. For our clients who adopt an objective and principled process for making investment strategy decisions, this is central to the accounts we manage for you.
• While it is popular to call this the Corona Market, that is misleading. The increase in market volatility as measured by the VIX, and the decrease in market valuation as measured by the S & P 500, is really being caused by political media hype and global oil market price wars. Accordingly, we recommend two courses of action.
• First, protect yourself against this infectious virus with common sense precautions. However, we are not medical professionals, and will confine our advice to your financial health. Now is an ideal time to do a Stress Test of your investment strategy considering your current values and priorities. This will tell us if you are overfunded, underfunded or remain in your comfort zone.
• The most conservative strategy you can afford is the one that meets your future cash flow needs, is easy to use and understand, and is reliable. Please feel free to call us with questions and schedule a telephone appointment or face to face meeting.

This advisor acknowledges the noise and chaos, had a fallback plan, refocuses on what they know and can control, and recommends principled action.

True Wealth Management

Retirement plan investors who are being advised to fill out risk tolerance questionnaires, that asset allocation drives results, to rely on market and economic forecasts, to hire managers who outperform, and to stay the course, have better choices.

An objective strategy is focused on principles for living, the efficiency of free markets, the uncertainty of the future, forward-looking performance measurement, and flexibility. As China’s leading reform-minded economist, and devotee of Austrian school economics, Zhang Weiying tells us, we can continue to live in confidence comfort because,

Precisely because human nature cannot be changed, the market economy exists, which is also the reason the market economy is necessary: It causes human actions to conform to the requirements of virtue.