I’ve contributed to the Denver Post monthly for a while now, and I’m grateful for readers who have reached out to me with thoughts, comments, and questions. Some about my writing, the market, and broader topics like the meaning of wealth or improving investor behavior. My goal has always been to encourage a discussion. I welcome and respond to each email I receive.
Recently a reader of this column asked how they might “hedge” their investment portfolio from a downturn. In other words, they were asking me how to “time the market.” How can they make sure they’re ahead of the game, as if that were possible. This question is problematic because it assumes the market can be “gamed,” that money can be taken out and put back in at fortuitous times, and with enough regularity to have a meaningful outcome. Since you cannot time the market, the best strategy is time in the market. As Peter Lynch said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
It’s a question I hear a lot as a financial advisor, and frankly, a misguided one. But it caused me to think about some questions that every investor should ask themselves. Here are a few that are regularly on my mind:
What if I’m not as bright as I think I am?
Everyone feels like a genius during a bull market. Confidence is good, but it can also be a handicap. Bull markets make everyone feel like a genius, just like bear markets make everyone feel like an idiot. The more you’re able to remain humble, patient, and intentional, the more the markets tend to go your way.
What am I wrong about that I currently believe with certainty?
Overconfidence can lead you way off track. Never be 100% certain when it comes to markets and investing. Many of your beliefs will prove to be wrong in the future. Some believe crypto is going to change the world forever; others assume it is destined to fail. Some believe interest rates will eventually scream higher; others think low rates are here to stay. Some are positive we’re in one of history’s great bubbles; others are convinced that this time is different in many ways. Be careful: something you feel strongly about right now may make you look silly in the future. Keep an open mind about what could happen, be attentive and patient, have a date and income-specific plan, and always consider the alternatives.
Do I have a plan, or am I reacting?
There is a difference between having investments and having an investment plan. A portfolio without a plan is just a collection of random securities. How do they work together to minimize your risk and improve your outcome? A plan involves a timeframe and dollar-specific goals, which ultimately create a decision-making framework. With discipline and guidance, a plan leads to the desired result.
It is easy to “do just fine for yourself” with a collection of investments when things are going well. But when circumstances change, a portfolio without a plan can spell disaster.
Am I making good decisions, or am I just lucky?
Luck is not an investment strategy. There is nothing wrong with being lucky in the markets. Money “made by luck” is still accepted at most retail stores. But acknowledge luck is not a repeatable process. Be honest with yourself about where your performance is coming from during a favorable market.
How did I react during past downturns?
We all know past performance is not indicative of future results, but past behavior is a good barometer of future behavior.
How did you feel in March of 2020? Did you panic and move your long-term investments to a short-term money market fund? Did you want to bail out, or did you buy? It’s essential to take inventory of your past behavior during turbulent markets because there is a high probability you will react the same the next time around. Know yourself.
How disciplined is my investment approach?
During bull markets, it feels foolish to sell anything. During bear markets, it feels silly to buy anything. Discipline and risk management feel worthless when stocks do nothing but go up. Understanding the difference between price and value is an essential skill.
It’s important to remember you can’t just be disciplined when you feel like it.
Is my portfolio durable enough to handle a variety of market environments?
This is the question the reader at the start of the article should have been asking. “Hedging” a portfolio typically means making changes with the expectation that the market will experience a pullback at some point soon. Pullbacks are a certainty, but we never know when, or for what reason, they may happen.
Instead, think about building a plan and portfolio suited for a variety of markets environments. The goal should always be actual cash flow and to capture as much of the “up” and minimize the “down,” knowing full well that the bull market could continue for another ten days or ten years. That’s why we aim to build a portfolio that generates rising income rather than relying on price fluctuation. We like the predictability it delivers, regardless of what the market is doing. We warn people not to play gin rummy with their investments: value long-term ownership of great companies irrespective of what the market is doing.
What is my plan for the next downturn?
The COVID-crash/bounce was fast… one of the fastest of all time. Investors who panicked weren’t offered a mulligan. A quick recovery can hide a lack of investment planning. A number of investors had no idea what to do during the COVID crash because they did not have a plan for the correction. Even a subpar plan is better than no plan. Prepare for a wide range of market outcomes, both good and bad, and remember that the market has always gone up on a long enough time horizon.
What questions do you ask yourself about your investments? I’d love to hear them. Send me a note at email@example.com. I’d love to write more about the questions you have and the areas of investor behavior and finance in which you are interested.
We’ve often said time is our most precious resource. More valuable than money, more fleeting than possessions, nothing can be done to stop the spending of our time. But like money and possessions, having too much time can be a bad thing. I’m a big proponent of having an abundance mindset, an approach to the […]