With the holidays upon us, we have the opportunity to reunite with family from near and far and just because we are related to them, doesn’t mean we like them all. Inevitably, as we are enjoying the company of our kinfolk, it happens—the arrival of our nutty aunt or uncle. The one who is unconsciously adroit at turning the most innocuous conversation about stuffing or football into something that broadly offends. Attempting a graceful exit from our predicament, we are faced with the reality that we actually share the same DNA and we vow to keep our distance until next year.
Investment markets exhibit this familial dynamic. Markets by their open nature invite everyone to participate and even go so far as to create investments that appeal to the extremes of the spectrum. These riskier investments fluctuate in value more. The investment majority prefers the less risky approach while a few risk-seeking malcontents stir up things. You may never invest in options, futures or leveraged exchange traded funds (ETFs), but that doesn’t insulate you from the effects of the risk takers in the crowd who do.
The only way to avoid the volatility is to leave the markets altogether, and a number of investors appear to have done so. Banks now hold more than $10 trillion in deposit assets despite paying record low interest rates. Depositors are accepting a negative return after taxes and inflation. This is as irrational as investors placing leveraged bets in the stock markets.
At LeConte, we expect continued volatility in the markets. With so much cash on the sidelines, the market is overweight with investors who are comfortable with more risk. Despite the urge to find the nearest exit and avoid the nonsense, we realize that the alternatives have their own shortcomings. So, LeConte adopted an extremely diversified approach to combat the volatility during the past three years. Our core equity position in our advisory accounts is comprised of more than 1,000 individual stock positions.
While diversification alone doesn’t completely insulate an investor from volatility, it might make your stay tolerable enough to keep you invested until the sideline money comes back and smoothes out some bumps. Whether it’s a dysfunctional family Christmas or a turbulent investment market, sometimes you have to go through it to get through it.