'Take Risk Off The Table': One Wealth Manager's Commentary On The Volatile Markets

In February, financial markets experienced a historic liquidation that paralleled the onset of the COVID-19 coronavirus pandemic. Since late March, markets have rebounded, with the S&P 500 rising in excess of 40%.

Despite the market’s impressive rally, some large investors are anticipating the resurgence of a bear trend. Bert Herzog, founder and director at Executive Wealth Management, spoke with Benzinga about how small investors can hedge their portfolios from larger drawdowns.

About Herzog

In 1981, Herzog set up an insurance company, that was later rebranded after growing its suite of products and services.

“We were part of the fee-based movement,” said Herzog. “I got my CFP and RIA and worked many years making sure we kept our clients’ best interests in mind.”

Herzog’s firm manages just under $1 billion dollars in assets via proprietary foundational research and technology.

“Back in 1998, we started developing tactical software programs that would allow us to overweight underweight sectors in equity, small-cap, large-cap, mid-cap international, obviously high-yield bonds, etc.,” he said. “It keeps people in their lanes and allows them to become overweight in times when things are good, and underweight when they should be taking risk off the table.”

The Disconnect

“There has been somewhat of a disconnect between the market and the current economic situation. It doesn’t support the levels that it’s at right now at 40 times forward earnings.”

Herzog told Benzinga that COVID-19’s impact on the economy may lead to further pullbacks in the stock market.

“With the length of the shutdown, we’re going to have economic constraints in the next three to six months,” he said. “I don’t really see a turnaround until 2021.”

Herzog expects that the impact on businesses and cities will be profound. As a result, the wealth manager urges investors to tread carefully, taking advantage of the rally to cut risk.

“A lot of people fail to realize the S&P 500 is overweight by 15 to 20 mega-stocks,” Herzog said. “Stocks like Amazon, Apple, Microsoft, Facebook, and Walmart may be doing well, but the majority of the market is still struggling.”

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Rebalance And Protect

“We’re not just going to be able to turn the economy on by switching a light switch. It’ll be more of a gradual buildup -- like a dimmer switch -- so, I am cautiously optimistic.”

The rally is a strategic opportunity for people in pre-retirement and early retirement to rebalance and protect.

“A lot of people, 55 and up, held and didn’t rebalance in 2008 and 2009," Herzog said. "They’re holding the same index and small-cap funds which have become up to 80% of their net worth. They need to take risk off the table.”

Herzog suggested investors allocate 45-50% of their portfolios to assets such as gold, cash and fixed income, waiting for the broader economy to recover before investing in riskier assets.

“I think that long-term, this will benefit you. It will give you an opportunity to be on the sidelines for the next 6 months and determine, alongside your advisor, what your risk profile needs to be to make sure you don’t ever run out of money.”

Once a broader recovery takes hold, investors can look to value and disruptive innovation; “There is no alternative to the stock market with interest rates at zero and federal stimulus,” Herzog said. “I do think long term we will be fine.”

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