Why One Advisor Went All-Cash in Early 2022

As president of Piershale Financial Group, Mike Piershale carries a significant mix of responsibilities that cut across business development, client service and operations.

Some days he hosts educational seminars for clients while others are spent in dialogue with service provider partners or in conducting market analyses. Every day brings something new, Piershale says, but the fundamentals of high-quality financial advice don’t change. Success is about educating clients, taking compensated risk and reducing the chances of unexpected negative outcomes.

‘Buy-Sell’ Signals

Piershale says his firm, in many ways, is a fairly standard wealth management practice, carrying some $260 million in client assets invested primarily through exchange-traded fund vehicles. The practice is built around three primary wealth planning partners supported by five staffers, and it has been in operation since 2000.

According to Piershale, the firm’s value proposition is built on portfolio management expertise and holistic financial planning, with a focus on supporting clients that are approaching or in retirement. Piershale says the firm takes its client care responsibilities very seriously, and its service model includes Social Security claiming optimization and retirement cash flow analysis.

“In many ways we are a pretty traditional wealth management outfit,” Piershale tells ThinkAdvisor. “One thing that makes us unique, however, is our tactical approach to building portfolios. We take an approach that is specifically tailored to help protect our clients as they approach and navigate retirement. In fact, right now, we have moved 100% into cash and cash equivalents in order to protect our clients from the destruction we have seen in the markets.”

Piershale says the full pivot to cash has been in place since the early spring, and it is unlikely that this position will be meaningfully adjusted before the end of 2022.

“The basic way I explain our approach is that it is based on three key ‘buy-sell’ signals, each of which controls the placement of a third of our total stock investments,” Piershale explains. “These are not our own signals, by the way, but rather a proprietary solution in which we participate.”

When any one of the buy-sell signals goes negative, Piershale explains, a third of the firm’s total assets are immediately transferred to cash and cash equivalents, specifically Treasury bills or money market funds. If or when the second or third buy-sell signals turn negative, a further third of the assets are converted to cash.

Currently, Piershale notes, all three buy-sell signals are “firmly in the negative,” meaning the firm’s clients are sitting entirely on the equity market sidelines.

“We also have a bond market buy-sell signal that hardly ever triggers a sale,” Piershale points out. “However, that signal also turned negative back in January, so we have also been out of the bond market for most of this entire year, thank goodness. We are experiencing biggest drop in bond prices for a nine-month period in the entire history of the U.S. At this point in time, all our triggers are negative, and so we are really just sitting on the sidelines.”

Staying on the Sidelines

Piershale says he has a strong conviction that more pain is in store across stocks and bonds, and so he does not feel anxious to reinvest and buy the dip at this juncture. Thanks to proactive communications and regular market commentaries put forward by the firm, the clients aren’t feeling overly anxious, either.

“Of course, we follow our signals very closely, but we have been sharing with clients a lot of compelling reasons why we believe this market is going to go down further before it levels out and starts to grow again,” Piershale says. “If you take the last three recessionary bear markets, for example, the swoons were deeper and they lasted longer than what we have seen so far. We believe we are in store for more pain.”

Piershale notes the dot-com crash, the Great Recession crash and the COVID-19 crash all delivered average negative returns in the ballpark of 40%. He says these are the most relevant market periods to consider today because each involved a bear market coupled with a true recession.

“At this point we seem to be firmly heading for a recession, and we’re only down some 20% in the equity markets,” Piershale says. “So, what comes next for this bear market? Again, we think we are in store for more pain.”

No Market Timing

Piershale emphasizes that his firm’s approach is not about market timing, and to that end, he notes the market triggers used to trade toward cash or back into equities are not designed to call a specific top or bottom in prices.

“I should point out that we didn’t totally escape the market pain of 2022,” he says. “Our models are down roughly 10% to 13% depending on the clients’ exact allocation. That is a meaningful drop, for sure, but it is a lot less than the Morningstar performance benchmark that we use. That index is down nearly 22% for the first nine months of the year.”

Piershale says this approach may be unorthodox, but it is continuing to attract and retain clients, such that the firm pulled in more than $70 million last year and $30 million so far this year, despite the market shock.

“For a small firm like ours to have taken in $70 million in one year, I believe that shows we really have built something that meets the public’s needs and desires,” Piershale says. “Our strategy does miss out on some of the upside, don’t get me wrong, but that’s what our clients know to expect. The average client we have is 66 and they have substantial assets, so the goal of protection means a lot to them.”

While he keeps his firm’s specific tactical philosophy close to the vest, Piershale encourages other advisors to think about rebalancing their growth-versus-protection philosophy. It is one thing if a firm specializes in serving younger people with significant investment horizons and aspirations for long-term wealth accumulation, but firms with older and wealthier clients should consider how much risk is really appropriate.

“With all these major red flags pointing to a recession, are we near a market bottom and heading for a soft economic landing?” Piershale asks. “It’s possible but not likely.”

(Photo: Susana Gonzalez/Bloomberg)