Old
rules don't apply
Markets have become so
volatile, and so vexing, lately that it is not unusual to see an investor
figuratively pick up his portfolio "ball" and just go home to wait it
out. I'm not referring to a "sell
everything" mindset in which one attempts at some later date to time their
next entry back into the market. No, it
resembles something more akin to just leaving the festivities to someone else
for the time being, holding on to whatever gains one already has, and
reassessing the situation after the turn of the year. To that effect, I am predicting that while the numerical integers surrounding
the daily performance of the averages might continue to be significantly
volatile for the balance of December, the sheer breadth of participation could
be somewhat muted.
So why, then, do
investors continue to play by the "old rules" in which buy and hold produces severe emotional distress every time
the Dow Jones goes down (or up) 500 points?
Certainly, not tinkering with the portfolio is more advisable than
micro-managing one's account. But
current events are a dreadful reminder that markets do go down and that
euphoria and bull markets can only last for so long.
Therefore, this is also
a good moment to suggest that even though the last few years have been
financially rewarding, the whole endeavor of portfolio construction and
management is to reduce risk and to mitigate against the potential for
collapse....such as we are seeing currently.
Was this bear
capitulation a surprise? Only if you
haven't been paying attention.
The value of a
quantitative discipline (such as the kind my proprietary database, ArlingtonEconometrics, proscribes) is
that one can more easily compare valuation metrics against a reliable data
history so as to remove exogenous variables that might distort the analytical
process. In other words, quantitative methodology provides a
consistent numerical framework for creating asset allocation within a portfolio
to reflect more precisely each client's risk/reward metrics.
Which are you... buying and holding, or rotating sector weighting to cushion the effect of a myriad number of
factors that influence portfolio dynamics and performance? To be sure, there are many influences upon
financial assets right now, from interest rates, politics, trade, social imperatives,
and more. This is not a time to move
along without a science or discipline.
Lesson
learned
Conventional modeling
is not right for everyone because it imposes a one-size-fits-all predisposition
to building wealth. And, as we
experienced in 1999 and 2008, it also doesn't allow for subtleties and
unintended extremes, nor a speedy recovery from market catastrophes.
Having a "balanced
portfolio" doesn't imply inertia.
Rather, it means boasting a fluid process of daily evaluation...even if
there are long periods of portfolio transactional inactivity as a result.
The basic fallacy of
the "old rules" is that they accept as true that times are always indestructible. And yet, history...and current events...shows
us that each day is fraught with its own
unpredictability. To wit, the current
investment tapestry has become a living nightmare for traditionalists.
The goal should always
be to diversify and to recognize that efficient adjustments in asset allocation
play a greater role in the probability of portfolio success than does any
individual security....or offbeat speculative wager you might make.... within
that portfolio. It is human nature to
think about your portfolio in terms of each
component's profits, losses, price,
etc. I understand that. But successful investing is regarding the
well-oiled aggregate of portfolio mixture, time horizon, and
performance relative to one's long term discipline.
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