THE ONLY WAY FOR INVESTORS TO COPE WITH A POTENTIALLY CONFUSING PERIOD AHEAD
There are decisions that will made within an investment portfolio during any given year that will determine whether you end up creating wealth for yourself or destroying it. The less decisions that are made, the greater the chances are that you won't get in the way of your own success. There are very few individual or professional investors who are able to create the mark they desire through rambunctious, often times unnecessary decision making. It is simply a waste of energy and resources when all is said and done.
The decisions that are made within a responsible strategy will essentially come down to two actions: Adding risk or paring back risk. Of course, there are a myriad of ways to accomplish the act of adding risk to your portfolio or cutting back on risk. The intention of the action, rather than the details of what, how and why are equally, if not more important. It is, after all, in the intention that portfolio performance is born. If you have a reasonable strategy paired with the ability to execute consistently, your intention should deliver the results you desire. The details are just the after effects of the intention.
It should be recognized then, as a responsible steward of your own wealth or your clients wealth, that the default intention should always lead to defense. There is no offensive path out of a situation that is confusing. Offense is not the answer to a loss. There is no offensive solution out of a black hole in a portfolio. In nearly every case of doubt, confusion, loss, indecisiveness, emotional decision making or crying in front of your monitor with your head in your hands (been there, done that) the answer will involve defense.
Let me tell you why defense will always be the answer to any doubt or hardship you face in the market. Again, let's assume you approach the markets with a responsible strategy that you are able to execute on a consistent basis. Your expectations as a result of your intentions will be positive over the long run. You have a positive expected outcome, in other words. How positive depends on your skill and experience. For some it will be 200 basis points above the S&P 500, for others it will be 2000 basis points in excess of benchmark.
The only thing that can get in the way of a positive expected outcome are inordinate losses. Inordinate losses are born out of situations where doubt, confusion, loss, indecisiveness, emotional decision making or crying in front of your monitor with your head in your hands takes place. In all of these cases, the default decision should be defensive in nature.
Be forewarned, there is fine line between being defensive and being a useless spaghetti dick. In order to prevent this outcome, I have found it best to have a majority of my defensive measures be systematic in nature. A set of extremely well-defined rules that serve as barriers against any kind of upheaval my strategy will face. It is no different than a military operation where you plan for every kind of possible contingency, with a well defined plan in place for each situation.
I bring all of this up because I think we are at a point now that marks the beginning of a confusing period for a majority of investors in the markets. The answer will not be to get offensive in the face of this confusion or frustration. That will only lead to incorrect decision making when the opportune time to strike again presents itself as it does several times each year.
If you do find yourself in a confusing situation - similar to what Bill Ackman will be facing at the opening bell tomorrow - your answer will inevitably start with DE and end in FENSE. Luckily for a majority of those reading this article, you actually have the option of defense. Bill Ackman may be beyond that point.
