Where can an investor look for opportunity when all avenues only appear to lead down an endless rabbit hole during times of crisis? Indeed, the first half of 2020 injected an extreme level of stress to most investors’ portfolios! The Winter market crash placed doubt in everyone’s mind regarding long-term viability of buy and hold strategies and certain sectors of the economy.

Change, for the most part, does not come easily for most because the human brain programmed over thousands of years of natural evolution to recognize threats to the status-quo. The brain automatically responds to such uncertain situations by resisting change. However, there is a  contrarian point of view. Flexibility in times of crisis often provides the necessary tools to succeed and position yourself for a better outcome. With this in mind, we will take a quick look in this quarterly newsletter at areas change can be made to address the remaining uncertainty that lies ahead for the second half of 2020.

Market Crash and Recovery

Pandemic, riots, uncertainty over an upcoming election and the collapse of several sectors of the global economy left many investors, especially retirees, in a precarious situation with lowered asset values. The main indices recovered much of their losses from the March 23 near-term market bottom. This created a V-shaped recovery that many assumed would not happen during the depths of the March pain. But once again, the market proved its ability to confound the analysts by marching higher despite persistent negative headlines.

The speed of the indices’ recovery in such short time leads Scherschel Wealth to believe that a retracing downward of nearly half the gains since the March 23 lows could be expected. Along with that retracing, we might expect to see continued back and forth volatility for the remainder of the Summer until attentions begin to focus on the lead up to the election. In our assessment, a retracing back downward could present investors a buying opportunity. Rotation and change into sectors hammered by the Winter market crash, but which still offer a long-term societal need, could be a prudent area to invest. Presently, the recovery of the major indices masks the pain in many individual market sectors comprising those indices. Scherschel Wealth reviews herein those specific sectors for present opportunity.

Possible Approaches (ETFs and Stocks)

At the moment, Scherschel Wealth advocates a two-pronged approach for the remainder of the year to put available investment capital to work. The first approach looks at individual stocks of several sectors presenting opportunity. Stocks in assisted living real estate, financial and energy sectors appear attractive. Selection criteria in these sectors include historical maintenance of a stable dividend even through the pandemic, large-cap stocks and low turn-over of key personnel. Additionally, Scherschel Wealth only considers large-cap energy stocks viable at this time and avoids any small- or mid-cap energy stocks.

The second approach uses only ETFs tracking the three major indices to find a suitable purchase entry point during an anticipated market retracing period. It is the belief of Scherschel Wealth the Dow Jones Industrials may move downward again to a range of approximately 22-23,000 before the end of the year. Should such a daily trading range present itself, we believe this would be an appropriate time to make additional purchases of major index ETFs.

ETF and ETN Risks

When choosing ETFs, it should be noted Scherschel Wealth currently avoids all ETNs and sector or strategy specific ETFs. Recently, many exchange trade product companies proved a penchant for closing many of their products on short notice due to low trading volume, extreme volatility in given sectors or simply due to the fact the companies could not make enough profits from the products. The pandemic brought a record closure of many ETNs and small valuation ETFs.

Moving forward, we believe the risk of purchasing such products, outside of the major index ETFs, introduces an unacceptable amount of risk to investors’ portfolios. Choosing the correct ETF which trades on high volume and holds a long-term track record is critical at this time to position a portfolio for the rest of the year going into 2021. Altogether, we believe the markets are not out of the woods yet for continued growth. But once the downward retracing of the last two months’ gains occurs, we think the time will be right to stake new positions in damaged sectors for the long-term.

If you seek financial advice or are uncertain about your investment portfolio, Scherschel Wealth would be pleased to offer you a complimentary analysis. Please contact Louis Scherschel to discuss further.

LinkedIn 2020 2nd Quarter Newsletter – Not Out of The Woods Yet

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