July 30, 2020

Monday the 20th July 2020 was only the second time in history where the S&P 500 gained over 50 points, yet 8/10 sectors that make up the index declined.  

The last time this happened was 23 February 2000 – immediately preceding the burst of the dot-com bubble.

The two sectors that gained were Consumer Discretionary and like the last several months – Information Technology – with the NASDAQ rising 251 points on the day. This is a vulnerable market, with a few powerhouses up, but most companies down.  

Source: Bloomberg, As at 24 July 2020

In fact the combined market cap of Apple, Amazon, Facebook, Microsoft, Netflix and Google are now bigger than the entire Japanese stock market.  

So what does this mean? If you’re chasing the index and growth now, it’s risky. 30 years ago Japan was the place to invest with an economy growing when other developed countries were not. However, for those that invested at the Nikkei’s peak, they are yet to have made back their investment.  

W‍hen considering equity investments, investors should check they’re getting the diversity they think.  

A solution lies not in the stocks themselves, but in the process of buying them. Selling put options to enter stock diversifies investors’ sources of return. In addition it generates:

  • more consistent income,  
  • a downside buffer to first loss, and
  • reduces portfolio volatility.

In times like these, it pays to diversify.  

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