Portfolio Must-Haves to Endure COVID-19

Invest with diversification and in innovation

Key Points

  • Investments in companies that innovate and thrive on advancement come through recessions with even more market share.
  • Allocating a portion of assets to disruptive technology allows investors to look beyond recessions to see the next wave of market movers.

Can I make my portfolio recession-proof?

Every bull market feels unique; 2009-2020 felt like it might never end. Low unemployment, low inflation, strong consumerism, tax cuts… What could possibly sour investor appetites or derail broad business optimism? Nearly every economist looked into their crystal ball and predicted more unencumbered growth. Yet we see things differently now, and maybe always will, in a pandemical world. That said, it may surprise you that our investment philosophy hasn’t changed at all.

What drives the economy higher during a period of expansion feels unique, yet every recession feels eerily similar.

The tech bubble now twenty years in the rear view mirror, the financial crisis of 2008, or the global COVID-19 pandemic –each has presented investors with similar challenges. When markets draw down sharply, the markets seize up and everything is tugged down together in a free fall. Few assets are spared as investors small and large liquidate and flush the markets to a bottom. (This is often referred to as capitulation.) At the most frustrating moment, the average investor finds it most difficult to remain disciplined. The behavioral instinct to sell is at its peak. Your brain pesters you: “This time is different. It might not recover like last time.”

When fear of the future and despair over investment loss are at their highest, the ability to endure market drop is directly related to 1) a diversified plan, and 2) an innovative portfolio.

A Diversified Plan, Despite Bias

Whether we are consciously aware or not, we are deeply loyal to brands and consumer preferences. When someone says Amazon, Apple, Walmart, Coca-Cola, Tesla, or Facebook, you see images that inform a feeling about the product or service. Our behavioral preferences lead us to invest with these personal biases in mind. Before you know it, a high percentage of your net worth is in one security or one segment of the economy. Often, this occurs when an executive invests a high percentage of personal net worth in the company he or she works for. From the inside, it can be easier to see business opportunities and an unending growth ramp that will pay off in returns. When the economy turns south, it may punish broadly, but some companies suffer more than others and are exiled or even go extinct through each recession. Holding one of these in large proportion can damage a long-term investment plan beyond recovery.

Two common investment biases

Most investors carry two biases whether they are aware or not: Mega Cap Bias and Domestic Bias. Most investment bias leans towards the top 10-25 largest companies inside a given market. Portfolios can look meaningfully similar even if they are made up of several mutual funds or ETFs with different defined strategies.

Second, most investors own a disproportionately large percentage of securities in their home country, carrying little to no international exposure. A diversified portfolio, both in company size and global exposure, will bring down the concentration risks and support the investor in the rebound following a recession.

An Innovative Portfolio

The current economy is both global and driven by technological advances. IBM research revealed that informational knowledge (the amount of publicly available information to be known) doubled every twenty-five years around the time of World War 2. Fast forward to 2020 where we now find information doubles every twelve hours! Technology, the quantity of available data, and innovation are fueling the 21st century landscape of successful businesses. As recently as the late 90’s the Dow Jones Industrial average included companies such as Bethlehem Steel, Eastman Kodak, F.W. Woolworth Company, and Minnesota Mining among their index. These stalwarts of their day are not among the market movers of today’s economy, which is why the second pillar of an enduring portfolio should be one that is poised to thrive in the new global economy.

Invest in companies that innovate

Investments in companies that innovate and thrive on advancement come through recessions with even more market share. A growing addressable market and innovative bias in a portfolio should lead investors to remain confident and stay with the investment plan through downturns. How much have things changed? These globally influential companies (some are now household names) didn’t even exist at the beginning of the 2008 financial crisis: Airbnb, Instagram, Uber, WhatsApp, and Tesla.

Invest in companies with disruptive technology

Successful money managers are focusing attention on the companies that will innovate and succeed in the new global economy. Allocating a portion of assets to disruptive technology allows investors to look beyond recessions to see the next wave of market movers. This segment includes, but is not limited to: robotics, artificial intelligence, software, healthcare technology, machine learning, e-commerce, social platforms, digital media, blockchain, and cloud computing. By allocating capital into these sectors of the new economy, investors are building enduring portfolios aimed at relevance not just for the next quarter, but for the next decade and beyond.

Build a portfolio diversified both by size and geography

With a portfolio diversified both by size and geography, and intentionally invested in innovative companies, an investor can withstand market draw downs and withstand the behavioral pressure to run and hide. Building wealth is a journey. Invest with diversification and in innovation.

At Cook Wealth, each client portfolio we create is driven by diversification and innovation and based on individual risk tolerance, time horizon, and personal needs.

 

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