How do Real Investors Take a Punch?
Ancient Chinese Curse….May you live in interesting times
With little question we live in interesting times and the prospects seem to indicate that we are likely to find them even more interesting in the future. Interesting times tend to accentuate the ups and downs of the stock market as measured by the Dow Jones Industrial Average and the S&P 500 indexes. These sharp movements up and down, often referred to as volatility, are accentuated by the fears of real people of what is yet to come. These ‘investor fears’ often turn into guesses and history has proven these fears lead to disastrous results. The famous quote by Mike Tyson comes to mind, “everyone has a plan until they get punched in the mouth”.
Most investors think of themselves as “long-term investors” and they are, until they get “punched in the mouth” by the uncertainty and volatility. Of course, they knew when they invested in the market that the ups and downs were certainly going to happen. But the recognition of the reality can take their long-term focus and throw it out the window and ultimately the wisdom of the crowd wins at the cost of the investor who let fear turn their long-term plan into short-term thinking that leads to exactly the results investors fear. They become the part of the statistic that makes the top half look good.
Of course, for investors who have longer term perspectives on the stock market and investing the old ‘buy and hold’ philosophy works just fine. For the “Rip Van Winkle’ investor buying into the stock market is a long-term proven winner over time. ‘Rip’ doesn’t care about volatility and consequently does not react in a knee-jerk fashion. He simply wakes up years later and is pleased about how well things turned out.
Yet, not everyone is a ‘Rip Van Winkle’ investor. Short term needs for cash are part of every day life. Real people need portfolio design that can benefit by the long-term advantages of the stock market and yet allow for the real live needs such as tuition payments, retirement income needs, vacations and large purchases.
There are times when having just the right amount of cash on hand is the best way to optimize the results of a portfolio. In addition, an intelligent portfolio design that incorporates non-traditional asset classes to dampen the impact of the stock market on the portfolio can be beneficial. Strategies such as Long-Short Equity, Managed Futures and Absolute Return strategies can reduce the volatility of a portfolio and dampen the investor fears at the same time allowing a long-term portfolio strategy to survive the “punch in the mouth” and be successful.
Real portfolios for real people focus on design and considering the multiple ‘punches in the mouth” investors will need to endure. Financial strategies are not something you pick off a shelf like toothpaste or a box of corn flakes. Portfolio strategies that endure the test of time consider multiple factors and incorporate real peoples needs and goals. Plan your portfolio well!
To learn more about Bob Klosterman, view his Paladin Registry profile.
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