July 2022. U.S. stocks ended their worst first half of the year since 1970 last month. The S&P 500 finished the first half of the year down nearly 20%.Unlike previous declines where the bond market cushioned the fall, in 2022, a typical retirement portfolio consisting of 60% stocks and 40% bonds has also fallen by around 15-20%. There were no places to hide for a typical retirement portfolio.
During a major market correction, many individual investors are not emotionally wired to sell their investments to protect their portfolios from a larger loss. Similarly, when the market recovers, some investors are too scared to jump back in and hence miss out on potential gains.
MyTimeEquity designs AI based curated algorithmic portfolios that are designed to manage risk in volatile markets and as a by-product seek higher returns. How? Using four Levers.
The first lever is asset diversification across broad asset classes. Consider driving on a three-lane highway to your destination. The goal is to get to the destination faster without getting into an accident or getting caught by the cops. Somewhat like an investors’ financial goal of making higher returns without taking too high a risk.
Now consider the lanes to be different assets – ETFs representing stocks, bonds, and gold. One way to get to the destination faster is to keep switching lanes. Switching lanes is the equivalent of diversifying between stocks, bonds, and gold to get a lower risk, without necessarily compromising on returns.
The second lever is called Time Diversification. What vehicle should be used to drive to the destination? A minivan or a bike. A minivan is equivalent to the rebalancing strategy that most retirement accounts use. Trusted, reliable, but may get stuck in traffic jams. A bike is equivalent to more tactical swing trading, more agile, risk of accidents is higher but also recovers faster to navigate through traffic. At MyTimeEquity by distributing our client portfolios across multiple strategies that trade in different timeframes, it increases our ability to get higher returns for a risk level that clients are comfortable with.
The third lever is Hedging. What should one do when there is a Traffic Jam, and all lanes are blocked? The third lever is that of using low volatility bonds or cash for hedging. To manage to risk, cash and low volatility equivalents are used as dry powder to absorb volatility in the market.
The fourth lever is the concept of “Evolution”. Imagine now having multiple drivers compete to drive you to your destination. Our AI based algorithmic strategies compete for allocation in client portfolios. Strategies that are consistent get more funds. Strategies that do not perform well get benched.
Putting these four concepts together – Asset Diversification, Time Diversification, Insurance and Evolution allows us at MyTimeEquity to manage client portfolios to their target level of risk and in the process seek the by-product of higher returns.