Balance for safety
By Adam Baley
My wife recently shared with me a conversation she had with a first grade student who asked her, “What does your husband do?” She replied, “He helps people with their money.” The student thought for a moment and said, “He must help people keep their money safe.”
I was delighted at the insight of a 7-year-old. At the heart of it, he’s right.
Our purpose as investment professionals is to help protect and grow families’ wealth – to help them meet their goals, whatever they might be.
“Safe” doesn’t necessarily mean safe from daily volatility. We view “safe” as safe from considerable (and potentially more permanent) loss.
Long-term investors should associate risk with unexpected losses, not unexpected gains. This definition of risk focuses the spotlight to where it ought to be: On long-term goals – not on noisy volatility.
One of our most important jobs is to steer investors away from things that can permanently damage their portfolio – for example, not overpaying for assets.
Of course, no one can be absolutely sure what assets may be worth tomorrow, which is why we build balanced portfolios. A widely diversified portfolio, even in a meltdown, will have narrower losses and may even be offset by encouraging developments elsewhere. Balancing your portfolio with stocks, bonds, commodities and real estate will help protect against the threats of both inflation and deflation – prudently growing wealth over time.
Sometimes, favorable moves in the market can push that balance out of whack. A 20% rise in stocks may make the allocation lean more in equities. Harvesting those stock gains and shifting them to cash or bolstering your bonds is a wise move. Rebalancing is always a function of cash and allocation needs – not an indication that it’s time to get out of the market.
Occasionally, nudging a portfolio back into balance means shifting more into stocks after they have fallen. Our job is to look at the market dispassionately and invest families’ portfolios in places of good value. After a steep market selloff, shifting some cash or bonds into profitable businesses at affordable prices can add value to the portfolio. Emotionally, that’s hard to do, especially if stocks become cheaper after we rebalance.
It’s human nature to have emotional reactions to market volatility. But relying on emotional cues to time your entry into and exit out of the market is dangerous. Anyone coming across the path of a bear would naturally want to turn and run. But the best response is to stay still and remain calm.
As investors, we routinely come across the path of bears, once every four and a half years on average. The natural response is to flee to safety. However, remaining calm and staying the course might mean the difference between your money lasting the rest of your life instead of going broke before you die. Avoiding considerable (and potentially permanent) damage also means not selling your life savings at 80 cents on the dollar.
A few years ago, I took my 5-year-old nephew ice skating. It was his first time. He was nervous. He knew the ice was slippery and his skates were sharp. I could see he had second thoughts, especially after watching other children struggle.
Before we stepped onto the rink, I put my hand on his shoulder and said, “You’re going to fall, but you’re going to be OK.”
He looked up with a smile and replied, “I know.” Grabbing my hand, he said, “You’re here – now let’s skate!”
Investing will always be done in a world of uncertainty. A bell doesn’t ring at the market top, and an “all clear” isn’t signaled at the market bottom. Uncertainty will always exist. Our job is to stand at individuals’ sides and lead them through it. We design investment strategies so that no matter what happens in the markets, our customers will be OK.
Adam Baley is a registered representative and associate at Landaas & Company.
initially posted Oct. 20, 2011