When you or your advisor make changes to your investment portfolio, it’s natural to feel regret. When you buy investments, there’s always a chance you’ll regret it later. More importantly, if you sell some of your investments and the market keeps rising, you might regret selling too soon—especially if you must pay taxes on the gains. On the other hand, if you sell and the market drops dramatically, you may regret not selling more.
In 2021, we discussed the concept of regret [i], and it turned out to be an important moment for many of our clients. By making timely adjustments to their portfolios, in 2022 our CIG Dynamic Growth Strategy avoided 60% of the growth benchmark’s -17.3% loss and our CIG Dynamic Balanced Strategy avoided 65% of the balanced benchmark’s -15.8% loss. [ii] Here’s what we highlighted:
“It is so easy at this stage, to miss the disconnect between the real-world economy and the stock market and be tempted to chase stock valuations that as a whole are trading near all-time highs based on many historical measures. One could follow narratives like, “stocks only go up over the long term” while listening to CNBC and ever bullish Wall Street strategists and act against your best interest.” [iii]
Today, we’re witnessing and hearing about a continuous stream of almost daily market records, based on the extreme concentration in the passive indices. Meanwhile, Wall Street strategists emphasize that survival in the evolving business landscape very well may hinge on embracing AI-driven innovations. [iv]
If you invest based on this information, your maximum regret may be missing out on the current surge in these markets.
Our perspective diverges from the consensus. The economic landscape remains challenging for everyday consumers. During the COVID crisis, consumers saved more money than usual. However, the Federal Reserve now reports that these “excess savings” have been fully spent. [v] Consumers drive nearly two-thirds of the U.S. economy. Unfortunately, many are financially strained – credit card delinquencies are at their highest level in over a decade and auto loan delinquencies are also soaring. [vi] No surprise – May retail sales were weaker than expected. When adjusted for inflation, they’ve been negative year-over-year throughout 2024. [vii]
While Wall Street remains bullish on AI, some companies are taking a different stance. Lucidworks, in a survey of over 2,500 business leaders, found that only 63% of companies surveyed plan to increase AI spending versus 93% in 2023. [viii] AI investments, once hyped as the next big thing, are now facing company scrutiny. AI’s trajectory resembles that of the Internet in 2000. Back then, the Internet was a long-term success story, but many companies struggled to turn it into a profitable investment. We wonder if Nvidia – whose sales of its advanced AI platform is driving enormous sales growth and its market capitalization to over $3 trillion [ix] – will suffer the same fate as Cisco Systems. Cisco’s routers were an integral part of connecting to the internet in the late 1990s. While Cisco soared to great heights during the dot-com boom, its long-term stock chart reveals that it lost 87% of its March 2000 value when the bubble burst and it has never fully recovered to those highs. [x]
Chart by CIG Asset Management using data from Barchart.com
Given the current market conditions—where we see extreme valuations, unusual market indicators, and daily anomalies abound—we’ve increased our vigilance and are adjusting as needed. Our primary goal is to align risk with our clients’ financial plan targets. We’re cautious, and strive to avoid unnecessary risks. We don’t want to fight against the Federal Reserve or make hasty judgments. The Federal Reserve plays a significant role in stabilizing the economy. However, recent poorly received Treasury auctions raise questions about its effectiveness in a market slump this time.
If you invest and ignore this information, and stocks fall, your maximum regret could be not being able to retire, donate or spend when you choose or create your desired legacy.
Balancing risk and reward is at the heart of successful investing. Our primary goal is safeguarding our clients’ financial health. We achieve this by maintaining both intellectual and emotional distance. Drawing from game theory, we consider “mini-max regret” to guide our decisions. This means minimizing the maximum potential regret while pursuing client goals. Since 2020, we’ve emphasized that the journey matters as much as the destination. Even during speculative peaks, immediate significant market losses aren’t guaranteed. Historical examples reveal that markets can recover and even surpass previous highs for a time.
Given the inevitable twists and turns, we don’t attempt to make crystal ball forecasts; instead, we observe and endeavor to adapt. Flexibility is our compass in ever-changing market conditions. If you’re a passive or do-it-yourself investor, you may want to brace yourself for potential portfolio roller coasters. Wild market swings can lead to substantial losses of greater than 25%. History reminds us that the S&P 500 can lag Treasury bill returns for a decade or more. [xi] Regardless of your investment style, we suggest you analyze your risk exposure carefully and understand your maximum regret threshold.
We continue to believe that there are other ways to potentially make money in the stock market outside of the Magnificent 7 stocks. On July 11, 2024, the June CPI release showed inflation fell -0.1% – the first month to month drop since May 2020. [xii] On this same day, the Magnificent 7 stocks, as measured by the Roundhill Magnificent Seven ETF (MAGS), fell -4.5%. The Russell 2000 small-cap index, which year-to-date was only up +1.2% the day before, gained +3.6%! Three of our clean transition investments which we own in our dynamic growth and dynamic balanced strategies – all gained over +2.0% on this day. [xiii] The small-cap outperformance on July 11 was historical. The Russell 2000 ETF (IWM) outperformed the S&P 500 ETF (SPY) by 4.5% – the second largest outperformance on record. The only day that saw larger small-cap outperformance was October 10, 2008, in the throes of the Great Financial Crisis and right before the Fed’s Quantitative Easing program began. [xiv] One day does not make a trend, but we are encouraged that market participation may broaden out to investments outside of the Magnificent 7.
Now, more than ever, having a professional fiduciary by your side is crucial. If you would like to explore ways to safeguard your financial interests during this wild ride, please contact Brian Lasher (blasher@cigcapitaladvisors.com) or Eric T. Pratt (epratt@cigcapitaladvisors.com).