Friday, January 28, 2011

Mama Said There Would Be Days Like This ..

Well, Momma actually did not say that regarding investing, but yours truly did.

The eruption in Eygpt is a prime example that on given given day, "The investment climate can suffer an earthquake."

Almost on cue after two months of a huge stock market run up, I have had a number of clients question my current defensive stance in our portfolios with their money. Hey, don't get me wrong, it's their money and a very legitimate question. That said, having been doing this for 26 years, I understand the cycles of investing and more importantly, how what's going on in the world can heavily influence our collective grey matter!

My response to clients has been as follows:

  1. I believe the stock market to be overvalued.
  2. I believe that a stock market can remain overvalued for longer than it should.
  3. The longer a market that is already overvalued moves in a further overvalued condition, the greater the future cardiac arrest (2000-2002 and 2008-2009).
  4. The U.S. stock market has been fueled by government stimulus, not fundamentals.
There are multiple risks on a worldwide basis that could take the stock market down 20-40%.

I do NOT have a crystal ball.

It is like walking by a house each week that seems to have lots of people in it, having a great party. It is normal human behavior to feel like you are missing out on the fun.
  • It is a great party, until the music stops and there are not enough "safety seats" for the majority of the people in the room.
  • I want my clients to have a safety seat!
I have dedicated an extensive area of my company's website (, click on WFG Advocacy) to the topic of behavioral finance. Lots of great articles, with tons of empirical data suggesting that our brains have been wired since the stone ages to have a two position on/off switch between greed and fear. That's it, no five-position dial.

The single greatest role a professional financial advisor plays is assisting their clients in finding the "middle switch position." That is hard to find on their own.

A day like today was not a matter of if, but more a matter of when. That said, who knows what will happen beyond today. Just so we are clear, no one knows. I repeat, no one knows. If you think you know, or a friend tells you they think they know, well, think again. These are the facts!

What You Should Do

The best course of action remains as follows:

  1. Do not be an "extreme" investor. This means sitting all in cash because you believe the sky is falling. It never works.
  2. As important, walking into the party at 1 a.m. and getting more into stocks when they are overvalued has proven equally as costly.
  3. The prudent, proper, experienced, appropriate, yet often very hard, thing to do is continue to allow a professional investment advisor who operates from a contrarian investment philosophy to keep you well diversified across an ever dizzying array of investment choices.
My investment approach changed as a result of the "sea change" in the world economy that started in 2008. We are now about "making it and keeping it" and less about "making more and then losing it."
  • In baseball terms, singles and doubles win ball games over time, not home run swinging.
  • In real estate terms, we are about "owning" lower, reliable, more consistent returns vs. "renting" higher, unreliable, inconsistent returns.

No comments:

Post a Comment