If you have retirement savings, then you better have a risk management process for not losing it. Anyone who has a portion of their money invested in an international stock mutual fund with exposure to countries such as China, Germany, South Korea, Italy, Brazil, Argentina, South Africa, Russia, Poland, Turkey among others this year is learning a hard lesson.

Unfortunately, making mistakes is a primary way we learn in this profession. If I lose some money, I expect to make it back.  One way to do that is not making the same mistakes over and over again.

One of the tougher lessons to learn is when to take losses. If your risk management process helps to keep losses to a minimum, then no harm is done because it’s just part of the game.  But, if you allow yourself to get caught in a bear market like in some of the aforementioned countries, you risk inflicting serious harm on your retirement savings. The goal should always be to protect profits and principal and get out of harm’s way.

It’s late August so why don’t we try and contextualize the year-to-date moves across the Global Macro landscape through the lens of our multi factor, multi duration research view.

At the start of 2018 our models began forecasting that global growth outside the US would begin to slow.  One result would be a strengthening US Dollar. Here’s where things stand:

  1. US Dollar Index is +4.3% YTD
  2. Euro (vs. USD) is -4.7% YTD
  3. British Pound (vs. USD) is -5.7% YTD
  4. Argentine Peso (vs. USD) is -37.6% YTD
  5. Brazilian Real (vs. USD) -15.3% YTD

Next is a sampling of foreign stock markets:

    1. China (Shanghai Comp) is -19.3% YTD
    2. Turkey is -23.1% YTD
    3. Indonesia is -9.0% YTD
    4. The Philippines is -11.4% YTD
    5. Italy is -6.6% YTD
    6. Germany (EWG) is -10% YTD
    7. South Korea (EWY) is -14% YTD
    8. Chinese Technology stocks (CQQQ) is -23% YTD
    9. Broad Europe (Vanguard VGK) is -6% YTD
    10. Emerging Markets (EEM) is -11.7% YTD
    11. Broad Latin America (ILF) is -13% YTD

Here are a few commodities:

    1. CRB Commodities Index is -2.6% YTD
    2. Oil (WTI) is +11.6% YTD but is signaling lower
    3. Copper (Dr. Copper) is -21.0% YTD
    4. Gold continues a terrible year @ -11.2% YTD
    5. Coffee continues to crash @ -21.0% YTD

Wasn’t that global review fun?  For the record, we do it almost every day, and yes it’s a lot of work. We do it to help put things into context because a major key to investment success is not necessarily what to own, but what to avoid!

My personal view is that a currency is in crash mode when it drops 10% or more. I also view it as crash mode when a stock or a commodity drops 20% or more. I would say it’s always a good career move to not own these kinds of things on the way down.

To finish up, here are a few things we do like at this point:

  1. US Treasury Bonds
  2. Utilities
  3. REITS

Long term investors including professionals have a habit of getting lulled into thinking that trees grow to the sky.  They ignore prevailing economic conditions and instead focus solely on company fundamentals. The reality is that over time, stocks and financial markets react to the business cycle and its varying economic conditions.  What will it take for investors to recognize this? What it always takes–a big price decline and people figuring out “I’ve overstayed my welcome” in all the wrong stuff!