Buy and Hold Works, But May Not Be For Everyone

I believe the above stampede was engineered by a few hyenas at the behest of Scar in an attempt to kill the king, Mufasa, and his son, Simba.  While the Lion King certainly is not a film about investing, I do think the stampede scene illustrates what I believe to be a fundamental truth about investing – fear leads many to run for the exits all at once.  This undoubtedly is a horrible strategy, and the herd is guilty of buying at the top and selling at the bottom.

The way to avoid this is to build a diversified portfolio, dollar cost average into riskier assets (i.e. spread your purchases over time), and only look at it on occasion.  Almost everyone can do one and two, but the problem lies with #3.  Almost nobody can put their money aside and not look at it.  And if you can’t, chances are you will worry about it from time to time.

Certainly there is nothing wrong with worrying about your money.  In fact I believe worrying, if properly directed, leads to prudent asset management causing the investor to focus on risk as the primary driver of asset allocation.  However, when worry turns to fear and panic, it leads to catastrophe.

We recently met with a very large investment management company, who wanted to pitch us on their investment process.  It had a lot of merit: essentially they skew their investments to assets that have historically outperformed the market.  The issue is that they expected (really almost require) us to hold their investments through up markets and down markets, regardless whether we felt it was prudent for our client to liquidate given their risk level. 

They use a lot of data and numbers to tell their story and wanted us to “teach” our clients how to invest – buy and hold these asset classes until the end of time.  My issue isn’t with their style or their numbers, but they fail to realize an essential fact: when markets are in their darkest hours many investors aren’t built to handle that pain and need to abandon ship, which typically happens to be at the worst possible time.

So how can we as wealth managers prevent our clients from doing this?  The best way is to know your client. This approach will lead to suitable, diverse, portfolio construction, which should minimize portfolio draw downs.  This strategy and discipline should prevent a wholesale sell off for the very risk averse clients. While we aren’t selling at the bottom, we are certainly paring back the risk as markets decline, which by the way is another method to avoid the herd mentality and the risks associated with it.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.

So What, Who Cares

I have been willfully ignorant of whatever is going on in Washington. When I do hear snippets here and there on Bloomberg I want to do this:

If I listen at this point it will only be a detriment to prudent wealth management:

• T = 0: Self-inflicted issue (e.g. the debt ceiling) that could have a “catastrophic” impact on the markets and the economy starts being chatted about in investment circles

• T = 1: Self-inflicted issue begins to pick up steam as a “legitimate” threat; markets largely ignore

• T = 2: Politicians dig in and hope for a comprise is lost; markets pick up volatility

• T = 3: Now the only thing that will save us is a last minute deal; market moves down a few percent, not enough for me to put cash to work and buy (annoying), but also not triggering any sell signals for existing holdings

• T = 4: At the last minute whichever party is losing the popularity poll caves; market back to where it was before

• T = 5: Self-congratulating politicians save the world from a problem they created; everyone vomits

• T = 6: For real?  Those insufferable mutants only kicked the can down the road, again not solving their own problem

• T = 7: Wait until we get to do this same charade all over again

I am fairly sure the above blueprint can be written in stone.  Thus, if you care to tune out Washington like I do then take a nap for a month and that’s where we will be.

Note: The Debt Ceiling talks of August 2011 coincided with a near collapse in Europe, thus the almost 20% decline in the markets doesn’t count.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.

Nothing New, Except my ACL

I apologize for the recent lack of posts.  I had knee surgery last week, and my absence is the result of prepping and recovery. I had really expected to be able to blog during the first week of recovery since I am a seasoned veteran of ACL surgery: this is my third; however, this time included more extensive work, and that didn't turn out to be the case. In fact as I write this I am still out of the office with limited mobility, with five more weeks on crutches.  In short, I hate my knees.

The markets must have detected my absence, as my hiatus hasn't yielded any real news of note.  This isn’t surprising, of course.  Here are 10 things that appear to be roughly the same as a few weeks ago.

1. Domestic equity markets are at roughly the same place.
2. Yields are still much higher than they were earlier in the year, though have seen a noticeable change since I've been gone.  
3. The Fed is still contemplating to taper or not to taper its bond purchases. 
4. Economic data has been expansionary.  
5. Syria, still in a Civil War.  No action taken.  But maybe.
6. The Government may did shutdown. This may be resolved postponed, etc. by the time of the post.  My guess is there will be kicking and screaming and right before it’s about to matter whichever party is losing the PR battle will cave.
7. There is also the debt ceiling too.  (See resolution to shutdown).
8. Emerging Market stocks are still attractively valued.
9. Europe is still Europe. 
10. One Big Change: Cleveland sports in the aggregate are no longer the national punching bag.  If Jacksonville counts, I think they win that distinction.

Frankly, most two week spans are strikingly similar:

1. Dominant trends tend to play out over longer periods of time.Thus, items that are worthy of attention tend not to change overnight and stories that are mostly noise self-reinforce to produce more noise.  
2. Seldom does any of this news require immediate reaction, in fact responding to new data without quality analysis often backfires.
3. While this lack of movement is boring, it bodes well for those of us who are off the grid for a while, either by choice or for ACL replacement.

I need to get caught up and back up to speed this week, but you can expect regular, roughly bi-weekly posting to resume later this week or next week.

The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts, Inc. or Lincoln Investment.  The material presented is provided for informational purposes only. Nothing contained herein should be construed as a recommendation to buy or sell any securities. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. All investments are subject to risk, including the risk of principal loss.