This year is off to one of the worst starts in the history of the Dow Industrials, and investors are increasingly concerned about wealth preservation in these turbulent times. Yet, a turnaround is inevitable, and investors are pondering the possibility of wading back into the market. The questions, as always, are what do I buy and when do I buy it?
Kevin Mahn, chief investment officer at Hennion and Walsh Asset Management, believes that the current chaos in the markets ought to reinforce the belief that asset allocation and diversification are crucial to long-term performance.
Diversification is key
“Over the last six years, we’ve been in a tremendous secular bull market run. And some investors have forgotten about the advantages of having a well-diversified portfolio. Even as we look at this very difficult start to the year, we saw certain areas in the market that performed better than others,” says Mahn.
Currently in 2016, the telecom and tech sectors are among the least dirty shirts in the laundry basket, each slightly outperforming the S&P 500, which is down nearly -8% this year (not shown). However, utilities are the only major sector in the green, posting just over a 6% return in 2016.
“On the fixed income side, we’ve seen areas such as investment-grade municipal bonds and preferred securities perform well too,” says Mahn. He continues, “It’s not just picking between which U.S. large-cap stocks are going to perform this year, it’s about building a well-diversified portfolio. And now more than ever, that’s very important.”
Increasing implied correlation among stocks has made stock picking more difficult than usual recently.
It’s no secret that the plunge in the price of crude has led not only the energy sector down, but has also led to general market contagion, driving down prices in global risk markets.
Yet, some larger energy stocks pay sizable dividends and will likely withstand the current credit crunch. Of his most recent energy market allocations, Mahn says, “We were very fortunate last week … We came out with a new energy-based strategy with Miller Howard Investing that focuses on opportunities that we see in the North American energy supply chain.”
Mahn says that oil will eventually decouple from stocks when oil prices finally bottom. However, he believes the bigger opportunity is in natural gas.