What an incredible week in an already incredibly volatile year!
The election was more than a week ago, and as votes continue to be counted we see that House, Senate, and Presidential outcomes by state are much closer than anyone anticipated. It appears that both Senate races in Georgia will go to runoffs, so the final balance of power in Washington likely won’t be known until January.
The other big unknown variable, of course, is the status of the COVID-19 pandemic and the announcement of a viable vaccine that can actually be tested, approved, produced, and delivered to 350 million Americans over the next few months.
The election and the pandemic are inseparable from each other; the uncertainty of one exists because of the uncertainty of the other. Both are so intertwined with each other that it is impossible to discuss one without discussing the other.
As such, it is possible to describe a matrix of four hypothetically possible economic outcomes:
So, what should a prudent investor do?
If you already have a globally diversified portfolio combined with a sound, logical financial plan, then doing nothing is probably the right answer at this point.
On the other hand, if you do not have such a portfolio, then you should probably start to worry. Holding a portfolio of large cap tech stocks that have done so well over the last four years in a low-growth economy could absolutely get smashed in an inflationary environment like described in Scenario #1 above. Ray Dalio, the legendary founder of Bridgewater, has produced a useful template to help address this dilemma. In the figure below, Inflation is plotted on the Y-axis, Growth on the X-axis, thereby creating four unique economic scenarios: Higher Growth/Higher Inflation, Higher Growth/Lower Inflation, Lower Growth/Higher Inflation, and Lower Growth/Lower Inflation. Dalio then shows which asset class (cash, bonds, stocks, gold, real estate) tends to outperform in each scenario.
The real beauty of a globally diversified approach is that you do not have to try to predict future economic or market conditions. You spread your bets around to the various possible scenarios and rebalance your portfolio over time, which encourages you “to buy low and sell high.” Of course, an investor using this approach must understand that he/she will likely not have the highest performing portfolio but more importantly, will not have the worst performing portfolio either.
At Telarray, we construct portfolios with a view toward the long term and diversify your total risk exposure based upon these four basic scenarios. Our Strategic Portfolio includes cash equivalents, bonds and stocks including Large, Small, US, and Foreign. And our T2 Trend Following Tactical Portfolio also includes exposure to gold, long Treasury bonds, and real estate to further complement our lineup of asset classes.
Viewing each individual asset class or strategy in isolation makes no sense. Only in viewing all asset classes together as a composite whole gives you as an investor the comfort that you need, knowing you have done everything possible to diversify as much risk as possible in your portfolio. In this approach, we will leave it to others to agonize over things out of our control like the election and the pandemic. As a result, we can live our lives in a healthier, less stressful and more productive manner.
Thank you for the trust you place in us to manage your financial future.