Let’s start by doing some basic math.
What’s $100,000 – 10%?
If you got $90,000, great!
Now, what’s $90,000 + 10%?
You may be tempted to say $100,000, but answer is actually $99,000.
So, if you lose 10%, then gain 10%, you end up lower than where you started! Not fair right?!
Loss prevention, or downside protection as we call it, is the art of minimising losses, so your money doesn’t need to work so hard to recover from periods of downward volatility.
Every decade or so, the major sharemarket indices all around the world undergo periods of massive losses. We refer to these periods as corrections. The reason that we call them corrections is because they normally occur following periods of unsustainable growth, and they are corrective because they bring the sharemarket back in line with long-term growth rates.
Corrections are normally triggered by a range of scary factors. The most recent major corrections are:
|Crash||Year||Share Market Performance|
|“Oil Crisis”||73-74||-45% (DJIA)|
|“Black Monday”||87-88||-23% (DJIA)|
|“Dot-com Bubble / 9-11”||01-02||-78% (Nasdaq)|
|“Global Financial Crisis”||07-08||-54% (DJIA)|
|DJIA = Dow Jones Industrial Average Nasdaq = National Association of Securities Dealers Automated Quotations|
Here’s a thought that may make you want to go back in time:
If you had $100k invested in the DJIA with $10k p.a. in contributions, and you suspected that the sharemarket was about to crash in 2008 (like the guys in ‘The Big Short’ did), and you deployed a downside protection strategy that capped your losses to half of what the index lost, and then re-entered the DJIA at the bottom, guess how much better off you would be today…
$10k better off? Not even close!
$25k better off? Nope…
$50k better off? Keep going…
The answer is $77,076 better off!
Or… 77% of your initial investment value!
So, what are The VCo doing about Loss Prevention?
We believe that the sharemarket is heavily overinflated, and that we are on the verge of the next major correction.
Sharemarkets can sometimes sustain periods of overinflation, but here’s why the current market won’t last much longer:
1) COVID-19. The world has still not fully appreciated the longer-term effects of the economic devastation caused by the governments’ response to this pandemic. Global governments at all levels created unconstitutional rules that crippled entire industries, killing billions of jobs and destroying hundreds of millions of businesses all over the world. The damage is in the tens of trillions. The only thing that prevented global economies from sinking into the worst economic depression in history was irresponsible fiscal stimulus i.e. ‘printing trillions of dollars’ without any tangible backing. In Australia, people on the dole even got a 30% payrise… for some reason. Governments cannot just keep printing money forever, as will be explained in Item 2: Inflation. So, as this tap runs dry, we’ll need to somehow restore the economy with the lowest levels of disposable income in recorded history. Good luck, us.
2) Inflation. When you increase the money supply, you decrease the value of that money. The decline in the value of money is called ‘inflation’. Inflation causes the price of most things to soar over time. When your income does not keep up with the rise in the cost of living, the economy suffers, corporate profits decline, and massive sharemarket selloffs occur. These selloffs are what cause the value of shares to fall. We are currently seeing the highest levels of inflation since the 80s, and there’s no telling just how much higher the cost of living could get.
3) Interest rate rises. When interest rates are high, you can stimulate the economy by lowering interest rates. Lowering the cost of credit incentivises people to borrow money for cool things like buying houses and growing their businesses. If however the interest rates are practically zero, like they are, you cannot lower them any more. In fact, the opposite is happening right now to combat the heavy onset of inflation. The US Federal Reserve just increased its rates by 25 basis points from zero, and Australia is likely to follow suit any month now. Rising interest rates will kick the economy while its down.
4) War. In the interests of not turning this blog into a novel, I won’t go into it. But trust me, international conflict, especially conflict involving Russia, is never good for global sharemarkets!
Okay we get it, we’re all f**ked, so what are The VCo actually doing about it?
The VCo Tuna Salad Wrap is not only defensive i.e. has lower exposure to the sharemarket during these turbulent times, but we have also taken tilts towards areas that are immune to downward sharemarket movements, such as our allocations in real estate investment trusts, infrastructure, gold, rare earth metals, and agriculture.
Note: The VCo Vegemite Sandwich follows a similar strategy, and you’re in good hands with this portfolio too!
Here’s how my very own Tuna Salad Wrap (red) is looking compared to Morningstar Conservative Benchmark (blue)
We may be sitting close to parity with everyone else right now, but when the proverbial **** hits the fan, I’m confident that our losses will be half of the industry averages (or even better), and our investors will be bloody stoked!
If there is ever a time to assess your performance, it will be the oncoming year.