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