With the most recent parabolic pyrotechnics in the stock market, a lot of people were feeling pretty good. It’s hard to blame them. What wasn’t to like? Ever-increasing balances in their investment accounts and the chimera of clear sailing ahead seems like a nice place to be. It was like a beer and back rub on a sun-drenched, white sand beach. I think it was a place that a lot of people are looking to hang around too.
But over the last two weeks, that sun drenched beach has turned into category 5 rapids on a wild river, throwing many people off balance and making them scared.
.According to recent figures from TD Ameritrade and Schwab, small investors and mom and pop were very enthusiastically in stocks, with trading volumes surging. And God bless ’em. Who wants to miss a really good party? Usually nobody. So everyone wanted to get in the market.
Like just about everyone else I, too, like a good party. I have been fully invested for many years now and appreciate what the newer arrivals have brought to the event. But I have a confession. For the first time in quite a while, the smallest frisson of worry started bleeding into my thoughts (even before the last few weeks of roller coasters). Of course there has been a smorgasbord of reasons to worry over the years since 2009, and those fears haven’t really been borne out. And I basically didn’t worry about it then, so why worry now? Maybe that’s just the nature of worry. It just shows up, unbidden, barges in, and there’s not much you can do about it except deal with it. So I decided, for now, it’s ok to worry.
That’s not my nature, by the way. I’ve typically had an ability to compartmentalize things as I have wound my way through life so far. It’s been helpful in lots of ways. Life can throw all kinds of hell at you. You can either wallow in it or find a path around it. When my mom was ill with cancer she asked me if I worried about her. I told her candidly that I didn’t, because I felt worry never solved anything. And she said “that’s exactly what your father said.” My mom, being a card-carrying member of the Worriers United Front, had clearly put out a worry survey. I didn’t score well. So whether by nature or nurture, that probably came from my dad.
With this swerve of mine, I felt a need to reconcile who I thought I was with what I was now doing. Then I realized a bit of worry can be good; it can be very motivating. It allows us to re-examine what we can do about what is worrying us, what we can’t do about it, and how we can be prepared for both sides of that coin. If you were worried about a fire in your home, it’s reasonable to make sure you have a number of fire extinguishers in the house. If fire strikes in the middle of the night, you would want one of those extinguishers near the bedrooms housing your kids and wife AND be damn sure you knew where it was. Or if you are worried about that fire and didn’t have any extinguishers, then maybe you should go get some shortly, if not today.
Which brings me back to the markets. If the stock market goes straight to hell starting tomorrow, my worry has motivated me to revisit the planning steps I took long ago. Our client portfolios, and my own, are invested so broadly in stocks, here and abroad, that my diversification should help soften the blow. I also have an allocation to high-quality government bonds (I know, not very bold) which should further help mitigate the damage. Most investors don’t want these until they really need them. The problem is, by the time they realize they really need them, the opportunity is lost and the solution gone.
I also decided that having a smaller portion of the portfolios in things like commodities, managed futures, and trend-following strategies could be helpful too. They have historically moved differently than both stocks and bonds, so they can be an excellent way to balance the risks of both. They can also mute your returns when the stock and bond markets are good. But having this element in a portfolio, where it can possibly hold the line when all kinds of things are going wrong, could also prove helpful. But it can also provide a bit of solace. And solace is rare when the bullets are really flying.
To buttress all of this I use a rules-based re-balancing strategy. I don’t want my investment mix to get too far out of whack. If they do, I have a basic process that tells me what I should do and when I should do it. Having an “if-then” approach, while un-sexily simple, is pretty damn handy. And comforting.
So, while I have given myself the indulgence of a bit of worry, I am using it as motivation to review my plans and strategy. Revisiting this strategy has helped keep me in check. Having a plan, really any kind of plan, is a sound approach. It doesn’t matter whether the plan is great, good or just kinda OK. Hell, even a bad plan is probably better than none at all. Just having a plan is a pretty valuable asset. It provides succor when it is most needed. It’s what you can fall back on when all else is chaos and confusion. So do yourself a favor and try to have the best plan you can. Just don’t let worry, or euphoria, get you too far from your mooring. Otherwise you will eventually get pulled out to sea, and there will be no boat to get you back.
So it’s OK for you to indulge in some worry. I do. But if you do worry, you better have a plan for what it is you are worried about. Otherwise the rarely appreciated value of worry has been lost.