Resetting
the odds
It only took a few “down"
days in the market last week for investors to begin cowering and thinking about
how to protect their portfolios from a bear retreat, and what strategies to
employ going forward to steady their accounts from a possible calamity of
significant proportion.
See how quickly that
happened?
So, owing to last
week's little “wake-up call", I
thought it would be helpful to reaffirm several points about which I have been
writing during the past few months....a strategy for tackling bad (or any)
markets:
Any professional money
manager worth his/her salt should start the portfolio-building process with a
clear understanding of the account's objectives and tolerances for risk. Too often this one essential is missed, and
you wind up with square pegs trying to fit into round holes. Chasing gains for gain's sake without clearly
understanding the risk factors creates a portfolio full of one-off
transactions, disjointed from any particular philosophy or methodology. And, more importantly, this type of staccato
investing usually leads to the inverse of the outcome you expected. Remember, a good portfolio manager is in the
business of managing client's expectations
about their money as much as they
are managing the money, itself. An
aggressive account allocated too conservatively is just as futile as a
conservative account managed too aggressively.
It is also incumbent
upon all parties to recognize that time
is one of the most critical elements to
any investment program. Typically,
traders have less of it, and less patience for the whole process. These are not good clients for investment
advisors because without time no strategy can be successful, really. Unfortunately, we are in the internet age, in
which everything is supposed to have been done yesterday! That just simply
is not what the investment schematic should be about.
If, in fact, last
week's pullbacks were to represent a harbinger of more negative stock market
news...for whatever reasons might be ascribed....the supposed disaster most
likely would not happen immediately or swiftly.....although it might....and
probably would look more like a steady drift sideways or downwards. Fortunately, the most successful money
managers do not look to compare to specific portfolio benchmarks ("We were
at X value; now we are at X minus 4%.."), but rather maneuver as if they
were navigating a vessel, a route of getting from point A to point B. Most assuredly the progression is not a
linear (straight line) configuration, but wavy with ups and downs along the
way.
Thus,
prudent portfolio stewardship is a matter of consistency of methodology and process rather than consistency of the integer of
results.
Perspective
Overall, the economy
and the financial markets are doing better than a decade ago. The tone has been set by government,
business, and social institutions for a more accommodative climate of economic
revitalization. That doesn't mean that
the angle of ascent will be straight up.
So if last week put a jolt into you, I would observe that you may have
lost perspective about why you invest, how you invest, and with whom you invest.
These issues must always be addressed with your representative to your satisfaction.
Investing must be
thought of as a long term set of probabilities, and as a sequence of balances
and equilibriums, with shifts occurring constantly that require portfolio
fluidity and distribution.
Without a doubt we are
at a confluence where changes in interest rates, inflation, portfolio allocation,
politics, and consumer confidence are redefining the status quo of the building
process begun during the past half-decade.
To believe disingenuously in an inexorable push upwards of stock valuations,
and other investment prices, is a tenuous proposition. The key to keeping one's sanity during this
period of flux is to be aware of the forces which ebb and flow, prepare for the
inevitable crisis in confidence, and then methodically evaluate one's options
for going forward.
To capture alpha (positive
return) you must prepare for the long-term and stay true to your discipline.
It's not overly
complicated.
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