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02 March, 2020 Flex Strategy

The Flex During Market Selloffs


- President, Patton Fund Management, Inc.

ALL BLOG CONTENT IS FOR INFORMATIONAL PURPOSES ONLY. ANY REFERENCE TO OR MENTION OF INDIVIDUAL STOCKS, INDEXES, OR OTHER SECURITIES ARE NOT RECOMMENDATIONS AND ARE SPECIFICALLY NOT REFERENCED AS PAST RECOMMENDATIONS OF PATTON WEALTH ADVISORS. ALL GRAPHS, CHARTS, AND TABLES ARE PROVIDED FOR ILLUSTRATION PURPOSES ONLY. EXPRESSIONS OF OPINION ARE ALSO NOT RECOMMENDATIONS AND ARE SUBJECT TO CHANGE WITHOUT NOTICE IN REACTION TO SHIFTING MARKET, ECONOMIC, OR POLITICAL CONDITIONS.  IT IS COMMON FOR US TO USE A FUND AS A PROXY FOR AN INDEX OR ASSET CLASS.  FOR MORE DETAILS SEE OUR FULL DISCLOSURE HERE.

The Flex and Market Downturns

If you want an investment that always goes up when the market goes down, it requires having an investment that always goes down when the market goes up. This is not what the Flex Strategy does!

The S&P 500 and Flex generally have disconnected performance…not inversely connected.

Low Correlation…NOT Negatively Correlated

The Flex has low correlation to the S&P 500. This means that the direction of the S&P 500 does not have a meaningful impact on the direction of the Flex’s performance. In other words, when the S&P 500 is down like it has been the past week and a half, the Flex could be down, could be up, or could be flat…they are generally disconnected but NOT inversely connected (negatively correlated).

This disconnected performance between the Flex and S&P 500 has been demonstrated over and over since its launch more than 10 years ago. The table below illustrates this.

S&P 500 Declines of -5% or More

This table includes every decline of the S&P 500 by -5% or more since the launch of the Flex in January 2010. The performance of the Flex is included as well along with the difference between the two in the far right column.

S&P 500 selloffs and flex performance

A positive in the Difference column occurs when the Flex has done better than the S&P 500. As this data clearly demonstrates, when the S&P 500 is down the Flex sometimes does better and other times does worse than the S&P 500. Remember these are all of the periods when the S&P 500 has declined by at least -5%.

Length of Time Makes a Difference

When investing, the longer the time period, the more likely it is that we get what we expect. For example, investors generally expect stocks to perform better than bonds. This is true over longer period of time but certainly not all shorter periods of time. The same is true with the Flex and our expectations.

The longer the market decline, the more likely the Flex outperforms.

In the table above I highlighted all of the periods when the S&P 500 declines occurred in 30 days or less…shorter periods of time. Of these six short declines, the Flex did better only twice. In the eight other periods when the S&P 500’s decline persisted for more than 30 days, the Flex did better than the S&P 500 in all but one. Clearly the more time that passes, the more likely it is that the Flex helps mitigate some losses in down markets.

Performing Exactly as Expected

Every bit of evidence and research demonstrates the Flex is performing just as expected. If this market decline persists, I would expect the Flex to gain ground on the S&P 500 and help reduce losses in a diversified portfolio. Furthermore, I expect the Flex to continue outperforming the S&P 500 over longer periods of time, regardless if it is a bull market or bear market, just as it has since its launch more than 10 years ago.

Contact Mark A. Patton :

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Any specific securities or investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own situation before making any investment decision including whether to retain an investment adviser.

All expressions of opinion are subject to change without notice in reaction to shifting market, economic or political conditions.  Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. This content was created as of the specific date indicated and reflects the author’s views as of that date. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results.  Any comments about the performance of securities, markets, or indexes and any opinions presented are not to be viewed as indicators of future performance.

Investing involves risk including loss of principal.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. For more information on specific indexes please see full disclosure here.

Any charts, tables, forecasts, etc. contained herein are for illustrative purposes only, may be based upon proprietary research, and are developed through analysis of historical public data.

All corporate names shown above are for illustrative purposes only and are NOT recommendations.

International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets. Investing in emerging markets may accentuate these risks.

Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower-rated securities are subject to greater credit risk, default risk, and liquidity risk.

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