The biggest risk to an equity portfolio could well be that it is 'long only':


The biggest risk to an equity portfolio could well be that it is 'long only':

Is a riskier portfolio one that holds more equity and fewer bonds? Or is the real risk to any portfolio is that it can only buy stocks, and not short the market if it’s going down?

September 9, 2021

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The biggest risk to an equity portfolio could well be that it is 'long only':

Is a riskier portfolio one that holds more equity and fewer bonds? Or is the real risk to any portfolio simply the fact that it can only buy stocks, and not short the market if it’s going down?

The Portfolio Platform could well be the answer to your problems.

Last week we discussed how human emotion is the single biggest reason for most retail traders losing money. We have had a few conversations with people since then, and we have found the interaction incredibly interesting; it certainly confirms what we were saying.

People have contacted us stating that they sold out when their position was down, and bought more when it was up. This is human instinct, but almost always utterly wrong. This merely guarantees losing money, rather than even giving yourself a chance.

We would never say that it is always wrong to sell out when you’re down, sometimes the economic climate changes, sometimes sentiment changes, but if it doesn’t, and you still believe in your position, then you simply sold because you weren’t instantly right.

The biggest of the emotions that plays havoc with most investors, after fear, is greed. It is imperative to avoid greed.

According to JPMorgan, over the past 20 years, the average investor reached an annual return of only 2.9%. As such, they significantly underperformed the general market as the S&P 500 yielded an annual 7.5% return during the same time frame.

Having said that, this return is very much inline with the average return of the FTSE 100 over the last 20 years which is a very poor 2.86%. Much less than most other global economies but this is a story for another day.

Are you happy with such low returns? A lot of people aren’t and that is why the number of retail traders is increasing every week. In 2020 alone, 10 million new brokerage accounts were opened in the US. People are hungry for returns, but sadly, they don’t all know about The Portfolio Platform, and many are doing it for themselves.

As we said last week, the single most important reason for this retail investor underperformance is emotional human behaviour.

The average investor is getting influenced heavily by media headlines, short term movement and behaviour from other investors on the new ‘social trading’ sites. Social trading sites rarely have professional traders on them, and if they did, you wouldn’t be able to see the wood from the trees anyway as there is always someone to shout their opinion louder.

Our traders are all professionals. All have a proven track record, verified by our Trader Selection Committee. We know who they are, what they trade and just how good they really are. On other platforms offering autotrading, they aren’t even vetted. Our committee are professional traders themselves, each with over 20 years trading experience so they know exactly what they’re looking for.

Despite the drop over the last few days, we are currently in a very bullish stock market environment. Last earnings season has been one of the greatest in stock market with 86.1% of its constituents beating analyst estimates.

As a consequence of this bullish environment, analysts are significantly raising their estimates for the next quarters.

Will earnings really continue this very strong recovery over the coming quarters or are analysts merely ‘going with the flow’? The markets going up, earnings are increasing, surely this will continue.

Here, I would point out that analysts aren’t traders. They make assessments based on the current situation and information and they go with them. Most traders know that nothing goes up, or down, forever, and certainly never ever, in a straight line. Just because earnings are going up now, doesn’t mean they will next year. Things change, and they often do so very quickly.

During the dot-com bubble for example, analysts made the same predictions as earnings increased. The '90s was an abnormally strong decade in terms of earnings growth, particularly in the world of tech. As such, analysts totally forgot that downward cycles existed.

They increased their annual EPS growth guidance to a staggering 15% for the five years following 2000. According to them, this high growth rate justified the record P/E multiples stocks were trading at and many investors got tricked into that story.

What happened afterwards? The economy didn't boom, it fell into a recession which took 3 years to recover from. Earnings in 2003 were almost 50% lower than what analysts had been predicting in 2000.

As markets were priced to analyst expectations instead of taking into account a possible downturn, the S&P 500 crashed and took 7 years to recover.

(Source: Insider Opportunities based on S&P Global data and Yardeni; adjusted EPS is used)

Let's get back to today... The P/E of the S&P 500 currently stands at 25.4x, which is extremely high compared to historical levels. This gets justified by the common belief that earnings will continue rising significantly. As such, the ratio would fall to an acceptable 20.7x by the end of 2022.

Now ask yourself how likely it is that earnings growth will continue to grow at higher levels than the historical average over the coming quarters. We don’t want to speak out of turn, or disagree with the majority for the sake of it, but we would say very unlikely indeed.

Interest rates are already at 0%. The money printer is running out of paper. Federal debt levels are hitting their ceilings. Pent-up demand and stimulus cheques have already led to record-high consumer spending over the past quarters and cannot continue.

Interestingly, the 2013-2021 bull market is playing out almost identically as the 1994-2000 bull market. The media is approaching the recent rally as "the new normal" and investors are FOMO buying heavily because stocks "can only go up”. This can lead to disaster.

It might not happen, nothing is certain. We might see a small pullback, and then the economy may continue on its course until the next global disaster.

As a long-term investor, it is extremely important to understand these dynamics. You will probably feel the urge to go all-in in risky assets as well. However, we would urge caution at this point. Long only funds, will lose the most if the market falls. It’s a good time to diversify as many on TPP have recently discovered.

This is where The Portfolio Platform stands out from the crowd. Our traders are professionals and will short the market if they believe the fundamentals are pointing towards a drop. They might not pick it perfectly every time, but they know that markets fall as well as rise.

(Source: Insider Opportunities with Tradingview)

A good portfolio, is a diversified portfolio. What is your IFA or Investment Manager doing to hedge your book against a potential drop in values?

Even as we write this, stocks are falling. It’s a bad day, fine, that happens. But what happens to your portfolio on a bad day? What if the bad day becomes a bad week or month? Most of those linked to traders on The Portfolio Platform have a well-diversified portfolio that at least has a chance of capitalising on such moves.

All extreme moves in the markets, are opportunities for traders. Last year was one of the most profitable on record for trading desks across the world, but did you make more on your portfolio than ever before? If not, why not? Why should it only be professional traders who are able to capitalise on such investments?

Now that TPP exists, it isn’t. You can too. Link to a selection of our traders and make what they make as your portfolio simply autotrades itself. Just read some of the testimonials if you think it’s too good to be true; our users now know that it isn’t.

If you would like more information about TPP and the products offered, please contact us here. Join the world of modern investing, join The Portfolio Platform.

If you wish to book a call and speak to a member of the strategy selection committee, please click here.

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“TPP might just be about to revolutionise investment for the retail market.”

- London Stock Exchange 2020