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"The market is not your mother. It consists of tough men and women who look for ways to take money away from you instead of pouring milk into your mouth." - Dr. Alexander Elder

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Sunday, 17 September 2017

Separating the Dos From the Don'ts of Investing



Caution alone is not an investment strategy, so Marks penned a follow-up memo last week to give investors six options for how to invest in a low-return world:

1. Invest as you always have and expect your historic returns.

2. Invest as you always have and settle for today’s low returns.

3. Reduce risk to prepare for a correction and accept still lower returns.

4. Go to cash at near-zero return and wait for a better environment.

5. Increase risk in pursuit of higher returns.

6. Put more into special niches and special investment managers.


(CW8888: Why many will fail at market timing?)

3. Reduce risk to prepare for a correction and accept still lower-returns.

Pros: Reducing risk can give you valuable dry powder to take advantage of future opportunities. The hope is that you can put money to work at lower valuations or higher yields if and when things eventually go wrong. Cash is a position even if it doesn’t pay much in terms of interest income at the moment. Reducing risk offers optionality.


Cons: You could be waiting a long time to put your money back to work, so extreme patience is required. In the latest streak the S&P 500 Index hasn’t had a double-digit decline since February 2016. There have been no 5 percent downturns since June 2016. And it’s been 10 months since the last 3 percent correction.

Timing the market is also a gateway investment to a cash addiction. There are always good reasons to wait for another buying opportunity. When stocks go up you tell yourself you’ll wait for a correction, and when a correction comes you tell yourself you’ll wait until they drop just a little further. There are no all-clears when things are going down, so you must incorporate rules to guide your actions. Going to cash also means you have to be right twice -- once when you get out and again when you get back in.


There are no right or wrong answers here, but Marks’ idea of combining different strategies seems like a prudent form of risk management. Investing is a form of regret minimization, so a diversification by strategy is an intelligent way to minimize the probability of making the wrong choice.


Read? Separating the Dos From the Don'ts of Investing

1 comment:

  1. Yet again? ... Media reaction

    1. The story from HM is "it is time to get out."

    2. He's right in the concept but wrong to execute right now

    3. The market is a little expensive, but should continue to ride it until there are a couple of big down days.

    4. There are stocks that are past my sell points, and I'm letting them continue to burble higher.

    5. I appreciate HM's message but I think now is no more a time to cautious than at any other time. We should always invest as if the best is yet to come but the worst could be right around the corner. This means durable portfolios, hedges, cash reverses, ...etc. There is no better or worst time for any of these things that we can foresee in advance.

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