- Phil Toews’ company specializes in keeping investors safe by protecting their money from major crashes.
- He told Insider about his approach and what nervous investors can do right now.
- Toew’s approach helped him perform better over the last three major stock market downturns.
US stocks are close to record highs, and if you could buy stocks in market crash predictions, it could also be record highs.
But responding to danger signals can be its own way of investing intelligently.
Phil Toews has managed mutual funds for 25 years focusing on strategies that would do well in bad times because they were not closely linked to the market. Ten years ago, he founded the Behavioral Investing Institute to teach investors to avoid obvious mistakes, such as making decisions by starting with a magnificent prediction.
“A lot of people just assume you have to make a market call,” Toews said in an exclusive interview with Insider. “The investment advisers we have worked with would leave us near market peaks even if we try to avoid crisis markets, and then they would invest heavily in us after market crises.”
In other words, they would make a wrong call at the worst time and then make it worse by doing it again. So Toews says investors do not have to decide if the stock market is a bubble and do not have to get out of it. What they need to do, he argues, is prepare for something and then not worry so much about what comes next.
As a simple way to illustrate Toews’ work, his Hedged US Fund surpassed the MSCI All-Country World Index in some of the market’s most turbulent years. The Hedged US Fund returned 5.9% in 2000 after fees, as the benchmark lost 13.2%, fell only 3% in 2008, when the benchmark fell almost 41%, and also made it better on the way back with a net return of 36% in 2009 compared to 30% for the MSCI Index.
It was the same in 2020. Morningstar data shows that the Hedged US Fund returned 34.7% in 2020, and the Toews Hedged US Opportunity Fund returned 30.5%, well above the average 7.9% return among their peers in the category lang-short equity. His Tactical Defensive Alpha Fund returned 17.1% for the year, almost double its category.
Toews credits that success for getting out of the market at the right time, and he shared his investment strategy to avoid much pain with Insider.
(1) Judge the prices, not the big picture
It may feel right to start with a broad view of the market and then dig into details, but Toews says it’s a mistake. Instead, he and his team have a trend-following algorithm that determines a market level that will trigger a sale of the stock components in their portfolios. He says it is currently around 2% below market level on 13 September.
The hedged US Fund has 70% of its assets, tracking the S&P 500 and 30% in the Nasdaq most of the time. But once the market has breached the team number, it will sell over three days and go to bonds.
“Predicting the market tends to be less reliable than just responding to price movements themselves,” he says.
The idea is to get out at the sign of potential crashes without acting too actively, which can cause increasing losses over time. Toews says the signal has stumbled two or three times a year, and it helped him get out of the stock market in February 2020 and come back in April of that year, avoiding the worst of the COVID crash.
There is also an option component in the strategy that allows him to stick to his plan while feeling prepared for sharp downward movements.
“We always hold put options that are between 60 and 30 days out of the money under the market. So if a sudden event happens, things that could potentially cause a very violent reaction in the market, we have these put under market for the full level of assets in the fund that would potentially offset immediate losses. “
(2) Have a hedge in shares
Toews urges people to stay fully invested even if they are worried about a stock market bubble instead of withdrawing their money and waiting for a crash. There is almost no chance that they will get it right.
“Find means or strategies that are capable of trying to be incoherent,” he said. “It would be hedged equity funds. There is a category of funds called options that are traded. It includes things like buffered ETFs or ETFs that have built-in options in those that try to limit downsides. and play 50% of your stock portfolio in that type of fund. “
(3) Fixed income strategies
As a manager who specializes in defensive strategies, Toews urges investors to preserve their bond portfolios and keep an eye on inflation, the biggest cause of bear markets in bonds, and a threat to investors’ principle as their returns.
“Allocate to an unlimited bond fund that has explicit goals of trying to counter rising interest rates or inflation,” he said. “An unlimited strategy that can be in things like TIPS or can be in things like short duration to avoid interest rate losses and can move tactically can potentially make a big difference.”