Josh Brown: It's Not Time to Buy the Dip

“The thing I want to leave people with is you need to know what kind of investor you are now. So you don't run off on side quests or play games that you're not equipped to play. If you are a swing trader or you're tactical this is a great environment for you, if you're not that don't try to learn it,” Brown said. “Play the game that you're supposed to play and for most people they should be playing no games, but I think this is going to be a great environment for trading. Not everybody who's invested is a trader."

Shifting to 'Risk Off'

Ritholtz shifted its “Goaltender” tactical model to a lower-risk position early this week, Brown reported, suggesting the rules-based strategy could move again in either direction.

“On Monday for the first time in 17 months the tactical model demanded that we go risk off. We were 100% equities from October of 2023 up until Monday and now we're 40% large-cap U.S., 60% T-bills,” Brown said on the podcast.

“That could reverse itself,” he added. “Maybe the market environment changes and we have to put back some of that stock exposure. … Or maybe things deteriorate, get worse and we have to go even more risk off. I don't know.

“I can't tell you what we're going to have to do in May, in June. And that is what trend following is about. It's not about forecast, it’s about reacting to current conditions and trying to do so in as efficient a way as possible,” Brown said.

Ritholtz’s tactical model doesn’t use economic or sentiment data, he noted, saying the firm aims to use the strategy to make fewer trades while staying tactical.

Avoiding Tax Liability

When the wealth management firm develops rules-based strategies, it also looks at asset location — exactly where it’s going to hold assets and make transactions, Brown said.

“When possible we want to run them in tax-deferred or nontaxable accounts. The worst thing you can do is incur a tax liability. You have exposure to stocks which have gone straight up for almost two full years and then it's like, all right, now we're going to take a huge gain because such and such problem in the economy; even if that ends up being the right decision you still are left with the tax bill that you've incurred,” the CEO said.

“So as a fiduciary — and we're all financial planners, my client-facing people are CFPs — we really have to weigh the consequences of not just returns but, like, how does this holistically affect the households that we're working for, so that's the number one thing. … Before we do anything, which strategies in which account types,” he said.

Ritholtz’s core models are invested in fixed income and U.S. and international stocks, with much direct indexing, “because we're doing constant tax-loss harvesting. This is actually a great environment for that strategy. If you don't have losses to harvest then one of the main benefits of doing a custom index versus an ETF goes away,” Brown said.

“Fortunately plenty of opportunities for tax loss harvesting right now. It's algorithmic. The algorithm is harvesting its ass off in an environment like this week,” he added.

As for how Ritholtz clients are reacting to this week’s selloff, Brown said, “Tell me which part of the country the investor lives in, what industry he works in and who he voted for.”

Client Communication Key

In a blog post Friday, the CEO stressed that communication with clients is key and reported hearing “incredibly inspiring” stories from conversations the firm’s advisors have had with their clients in this tumultuous week.

“Younger investors are asking about how they can get more money into their accounts,” he wrote. “Retired investors are repeating our philosophy and investing mantras back to us.”

In times like the current market downturn, he added, “all you can do is remind people about why we diversify, why we believe in both strategic and tactical asset allocation and why they’re taking risk in the first place.”