Starting a New Week: What the Markets Have Up Their Sleeve
Markets manage to surprise us from time to time. It's like they've got something up their sleeve. They pull it out just when you think you've got a good grasp on what's happening. You put your money just where you think it should be to take advantage of rising prices while giving you some protection against downturns and, whammo!, markets move just so that you question whether your scheme will really accomplish its design.
Yes, it's a bit of a paranoid vision of how markets work, but isn't there some truth to it? For example, during the crash of August 24th and the following days of further declines, the 30-year treasury bond didn't quite rise as one might have expected. It rose, but not by much. Gold also didn't pop, as some think it should when stocks crash. (Why they think this is another matter; it's not really the way things typically work.) Such unexpected events can shake your faith in the rationality of markets and your brilliant asset allocation.
Of course, your first mistake would be thinking that markets really are "rational." That's likely because the "Efficient Market Hypothesis" has sunk its claws into your brain and convinced you that prices will reflect everything known about a security or asset class. They don't. People know on the one hand and act on the other. Sometimes the twain do not meet. Just as you observe those around you at work or in your family behave in what might be described as a "puzzling" manner, so too will markets exhibit what appear to be crazy patterns. The long bond "should have" risen more dramatically. It "should have" offset the losses from stock more aggressively. It didn't. C'est la guerre.
So where does all this leave us this week? Well, for one thing, if you believe the losses in the stock market haven't ceased altogether, you might want to take a long look at your allocations. Maybe you look at them in this light: If stocks crash even more dramatically, are you OK with where your money sits right now? For example, if you're holding 60% of your portfolio in stocks (reflecting the "classic" 60/40 split between stocks and bond), are you OK if stock drop another 50%? That would result in roughly a 27% loss in your portfolio. No problem? Maybe not. Maybe you can calmly survey the battlefield and watch as your left flank is overrun by enemy armored divisions, knowing that you're reserves and resources are such that you'll be more than able to fight another day.
Then again, if you can't picture yourself reacting with such equanimity, maybe you should consider adjusting your allocation, if only to prevent yourself from making stupid decisions in the midst of the battle. Remember that your emotions will likely be your worst enemy in making investment decisions. Either develop the discipline to keep your head even as your heart races and visions of Armageddon afflict your brain, or take yourself out of harms way for the time being.
What to do? Well, we don't give investment advice here, but do try to use our reason and common sense whenever possible. In that light we remind you that that old boring stand-by, cash, may prove a good friend to those whose clear thinking may have been muddied by unexpected asset responses, or lack thereof, to the latest gyrations in stocks. Cash has a way of calming the mind and body. It just sits there. Yes, it's not going to be your best long-term strategy. But we're not talking long-term here, just the upcoming weeks, perhaps next couple of months. Short-term isn't your best time horizon in the grand scheme of things when it comes to investing (or anything else important, come to think of it), but sometimes the pressures of the moment need to be addressed to preserve your sanity.
Only you know what's best for you. And if you've not put any thought into how you have reacted in the past to short-term violent market actions, and therefore how you might react when facing such action in the future, this might be the time to do some self-examination.
Yes, it's a bit of a paranoid vision of how markets work, but isn't there some truth to it? For example, during the crash of August 24th and the following days of further declines, the 30-year treasury bond didn't quite rise as one might have expected. It rose, but not by much. Gold also didn't pop, as some think it should when stocks crash. (Why they think this is another matter; it's not really the way things typically work.) Such unexpected events can shake your faith in the rationality of markets and your brilliant asset allocation.
Of course, your first mistake would be thinking that markets really are "rational." That's likely because the "Efficient Market Hypothesis" has sunk its claws into your brain and convinced you that prices will reflect everything known about a security or asset class. They don't. People know on the one hand and act on the other. Sometimes the twain do not meet. Just as you observe those around you at work or in your family behave in what might be described as a "puzzling" manner, so too will markets exhibit what appear to be crazy patterns. The long bond "should have" risen more dramatically. It "should have" offset the losses from stock more aggressively. It didn't. C'est la guerre.
So where does all this leave us this week? Well, for one thing, if you believe the losses in the stock market haven't ceased altogether, you might want to take a long look at your allocations. Maybe you look at them in this light: If stocks crash even more dramatically, are you OK with where your money sits right now? For example, if you're holding 60% of your portfolio in stocks (reflecting the "classic" 60/40 split between stocks and bond), are you OK if stock drop another 50%? That would result in roughly a 27% loss in your portfolio. No problem? Maybe not. Maybe you can calmly survey the battlefield and watch as your left flank is overrun by enemy armored divisions, knowing that you're reserves and resources are such that you'll be more than able to fight another day.
Then again, if you can't picture yourself reacting with such equanimity, maybe you should consider adjusting your allocation, if only to prevent yourself from making stupid decisions in the midst of the battle. Remember that your emotions will likely be your worst enemy in making investment decisions. Either develop the discipline to keep your head even as your heart races and visions of Armageddon afflict your brain, or take yourself out of harms way for the time being.
What to do? Well, we don't give investment advice here, but do try to use our reason and common sense whenever possible. In that light we remind you that that old boring stand-by, cash, may prove a good friend to those whose clear thinking may have been muddied by unexpected asset responses, or lack thereof, to the latest gyrations in stocks. Cash has a way of calming the mind and body. It just sits there. Yes, it's not going to be your best long-term strategy. But we're not talking long-term here, just the upcoming weeks, perhaps next couple of months. Short-term isn't your best time horizon in the grand scheme of things when it comes to investing (or anything else important, come to think of it), but sometimes the pressures of the moment need to be addressed to preserve your sanity.
Only you know what's best for you. And if you've not put any thought into how you have reacted in the past to short-term violent market actions, and therefore how you might react when facing such action in the future, this might be the time to do some self-examination.
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