Jack Plotkin, Former Goldman Sachs Financier, Weighs In on Playing it Safe With Investing

    So far, the stock market has successfully navigated the impacts of the coronavirus pandemic and the subsequent economic crisis. In fact, according to major U.S. indices, there were five straight positive months prior to the slight correction in September. In terms of what is coming next, Jack Plotkin, formerly of Goldman Sachs, says there are different analyst opinions: while some remain bullish about the near future, others are skeptical about how long this good run can continue. However, the Federal Reserve’s measures essentially taking bonds out of the equation as the usual safe asset begs the question of what does “playing it safe” really mean in 2020? Jack Plotkin, who spent nearly a decade at Goldman Sachs, weighs in on what safe investing means in the current environment. 

    The pandemic has plunged the United States and the world into a recession and led many countries to record two consecutive quarters of negative GDP growth. Plotkin highlights that there are different ways to think about investing during recessionary periods. Risk-seeking investors view recessions as a unique opportunity to buy stocks at a discount; in other words, they are getting stocks at price points they would not normally have available. Those who employ this strategy are typically younger and, given a sufficiently long time horizon and optimal selections, stand a good chance to profit from it. A general and well known rule of thumb, that is particularly applicable to recessions, is that the longer the time horizon until retirement, the more risk and, by extension, exposure to stocks, an investor can take.

    Invest with an Appetite for Risk

    Plotkin goes on to note that another strategy for an investor with an appetite for risk is to invest for recovery. In that approach, according to the finance and investment strategist, one must recognize and respond to positive macroeconomic signals that indicate that economic sectors are beginning their turn toward recovery. Since central banks tend to keep interest rates low during recessions, this makes fixed income instruments less attractive and organically tilt investors toward riskier asset classes. As a result, stock markets have been known to perform very well during periods of recovery. Heavily leveraged companies do better than others on the upswing, as do growth and small-cap stocks.

    Plotkin also comments that there are numerous different strategies for investors who are risk-neutral or risk-averse. More specifically, the former Goldman Sachs financier advises to remain invested and not give in if there is a panic on the market. If the investments are in stable, low-risk companies the best move is to stay the course and wait for the inevitable correction. On the other hand, investors who panic and liquidate their holdings will incur a loss and jump ship at the worst possible time. 

    Investing During a Recession

    As for stock picking during recessions, Plotkin points out that a good way to scale back risk is to opt for established companies with healthy balance sheets, stable cashflow, and a proven track record of surviving economic downturns. Historically, one of the safest sectors has been consumer staples, which encompass goods such as dried foods, beverages, and household and hygiene products. Because these goods are essential to daily life, their consumption is typically not significantly affected by shifts in the economic landscape. 

    The fixed income strategies that many investors employ during economic crises have been much less effective in recent months. This, Plotkin comments, is due to record low bond yields amid the Federal Reserve’s expansive quantitative easing. Commodity investing is the other obvious choice, the investment strategist highlights; however, it works better when the recession is restricted to a single country or region. Since the pandemic and recession are of global proportions, demand for commodities has slowed down amid slower global economic activity. This has pushed prices down across the board. Perhaps the best options are precious metals, which offer a bulwark against the coming inflation caused by central banks around the world printing money to offset the economic slowdowns and job losses.

    The financial industry has continued to put effort toward creating products that mitigate investment risk. In mid-2018, a company called Innovator launched one of the first sets of products known as “defined outcome” exchange-traded funds. Their funds are using options to allow investors to participate in the market to a certain degree. Their approach is to limit both losses and gains. ETFs by Cabana Asset Management are using macro models that are rebalancing money among asset classes according to macroeconomic changes. Typically, each of the funds has its particular drawdown or maximum amount it can lose. By using both long and short positions, Plotkin points out that they have been able to create strategies for both bull and bear markets. 

    A company called Simplify has used a slightly different approach by creating their “Convexity” fund, an ETF that is invested mostly in S&P 500, with a small amount going into put and call options. According to Plotkin, what this means for the company is if the market swings hugely either in the positive or negative direction, options come into play, thereby increasing the swings (amplifying large gains or covering large losses). On the other hand, if the market remains within boundaries, the options expire worthless and the ETF trades like the S&P 500, less the several percentage points spent on options.

    Plotkin concludes that with yields at lows, there is a lot of demand for inventive products that temper the volatility of the stock market while still offering decent returns. With risks themselves evolving and events becoming more unpredictable, it is reasonable to expect that the mitigation tools will continue to evolve as well.