When you do not understand what is going on with your investments or their market environment, you are involved in a “Chicken market.” Unlike a bull or bear market, chicken markets can go anywhere. Up, down or sideways.
What should you do?
Drawing from my limited training in karate, a sensei once said, “When faced with a dangerous opponent or situation, the best defence is to be somewhere else.”
You can do that with investments too.
Presently the value of precious metals, most resources, oil, and long-term bonds are pretty much unknowable beyond the next hour or two. Do you really need to compete or could you move quietly to a blue chip dividend fund or maybe even cash?
The biggest risk to your physical survival is trying to prove things to a uncooperative opponent. The biggest risk to your financial well-being is trying to make something good out of a bad or unknowable situation.
Just as with an outlaw biker walking towards you with a machete, your best move is to turn 90 degrees and leave the area. Or as the Third Lord Moynihan recommends,
“Of the thirty-six ways of avoiding disaster, running away is the best.”
Lord Moynihan appears to have exercised this option several times in his colorful career, so he may know of its worth. He remains, however, a poor role model.
Running away should be a consideration for a portfolio designer to consider. It is not about consensus. If everyone thinks the market is going up, that is not useful. Maybe they are in a position that says there is an 80% chance it will go up 1% next month and there is a 20% chance it will go down 15%. Then what? Giving up small probable profits to avoid less probable but larger losses is a winning tactic.
The single advantage of safety is that you can avoid having to earn the same money twice.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: email@example.com