As your portfolio manager, it’s my job not only to invest your capital, but to protect it as well. One of the ways I preserve your capital is by selling positions and going to cash when market volatility strikes.
When do I start transitioning to cash?
For example, I started selling stocks and going to cash in the spring of 2015. This action was triggered by the weakening price of oil. By August/September of that year, the markets were experiencing even more volatility and the general sentiment was negative. As a result, I sold more equity positions and increased the cash held in our portfolios. In December, the markets enjoyed a bit of a rebound, but soon after the New Year, China’s Shanghai Exchange was deemed badly overvalued: a dramatic correction then ensued. This situation sent markets around the world into a further tailspin. Once again, to preserve capital, I sold off many of our equity positions and went to cash.
How much cash will I hold in an account?
During the last year or so, when market volatility was at its peak, my portfolio models were holding between 50% to 100% cash.
When will I start lightening up on cash positions?
Before I buy back into the markets, I wait for them to show me that they are moving in a steady, positive direction. If I believe a move to the upside is only short-term and not sustainable, I will remain on the sidelines.
What are the signs that it’s time to buy back into the markets?
When certainty is restored to markets, volatility lessens and markets stabilize. When this happens, it’s time to move from a majority-cash-position and begin buying equities again. So what factors can help restore certainty for markets? There are many:
- Interest Rates: It doesn’t matter a great deal if interest rates are going up or down. What matters most is that the US Federal Reserve and the Bank of Canada provide some confirmation. Once markets know what they face, they tend to stabilize.
- Price of Oil: Like interest rates, the markets become less volatile when they have a handle on a realistic price for oil. So, if the current price were to stabilize at $35–even though it would be dramatically lower than the $100+ price oil was just a few short years ago–that would be the “new normal,” and subsequently market volatility would be reduced.
- China: Over the last several months, markets were upset by various situations involving China. First, back in August, the Chinese central bank devalued its currency, the Yuan. Second, in January, questions arose when the Chinese announced their gross domestic product (GDP) had grown by 6.8% when international market watchers felt 2.4% was a more realistic number. The Chinese have since revised the numbers, bringing them more in line with market expectations. The third and final issue that continues to contribute to market uncertainty is the Chinese stock market. Many feel the overall market is inflated.* Until investors are confident that it isn’t, volatility will endure to some degree. (*Source: http://www.theguardian.com/world/2015/jul/16/why-chinas-stock-market-bubble-was-always-bound-burst)
- US Election: Though not as great an influence on markets as the preceding three factors, markets do tend to be affected when there is indecision about whether the US is going to be led by a Republican or Democratic government. A final election outcome will definitely provide some market stabilization.
Market volatility will always be a part of investing. No one can control it, but going to cash is one step I can take to control the impact it can have on the value of your portfolio.
This blog post was prepared solely by Herb Rempel who is a registered representative of HollisWealth® (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this blog post are those of Herb Rempel alone and not those of HollisWealth.
® Registered trademark of The Bank of Nova Scotia, used under licence.