Every Which Way But Loose
Sometimes I feel like I’ve entered the Twilight Zone with Yogi Berra. I know that this kind of stuff makes for interesting media, but like it or not the more we take this all in the more we need a Tylenol. So here’s what I say to all of them, “MAYBE“. Even a broken watch is correct twice a day. But the real conundrum with all these prediction is whether to act preemptively, reactively, or not at all. If I think that something is going to happen in the future (a market crash, for instance), and align myself for that outcome today, I’ve totally bet on the if-come.
That’s not prudence, it’s roulette. If, on the other hand, I just stick my head in the sand and take whatever comes along, it will either cause me to over react and typically make bad decisions, or just wring my hands and hope things will get better because the damage is already done. Ahhh, so what’s an investor to do?
Dynamic strategies, that’s what. The answer is somewhere in the middle of the two extremes, where you listen to the markets based upon WHAT YOU ALREADY KNOW, and then position yourself to invest with the prevailing trend. Then, if the trend continues you either add to or subtract from your exposure. These aren’t knee jerk reactions neither are they based upon crystal ball assumptions. Typically, the movements are incremental, where you might be fully invested one week, trim 3-5% the next and by months-end be 15% hedged. That’s obviously just an example, but having a plan that, absent of a total market meltdown, reduces equity exposure as the boom/bust cycle unfolds will help keep you out of major market downturns. When I say that I do mean MAJOR downturns, as normal market fluctuations of 5, 10 or even 15% just can’t be bypassed else you get whipsawed constantly and ultimately don’t reap real rewards.
When I do planning using Monte Carlo simulation, it’s truly amazing at the difference to pre-retirement accumulation or retirement cash flow protecting your capital makes. Because you can do this the typical pie-chart allocation is obsolete, as you can allocate more to stocks and thus get a better return over time. All those correlation arguments are diminished because you don’t need for some things to offset others depending on what is up and what is
down. Doing it that way just brings you to the middle (the best of the worst and the worst of the best). What you do need to be sensitive to at times is your trading strategy, not simply your allocation. For instance, instead of say, 60% stocks and 40% fixed income, maybe the market cycle promotes a long/short, currency, or even a private equity strategy that will come and go as the situation dictates. Regardless, you don’t set and forget your life and neither should you do it with your investments. Try it, you might like it, and you might even look forward to your quarterly statement no matter what the market is doing.