The Two Faces of Risk

August 3, 2014

Investment Newsletter for the end of July, 2014

July was a bad month.  In fact, the last two months have not been good.  The market as a whole was down and your portfolios were down accordingly.  So what does this fact mean?  What do we do now?

Risk has two faces.  One face is the up periods.  The other face is the down periods like July.  You cannot have the up periods without the down periods.  They go together.  Think of risk as fluctuations above and below an average point.  Without risk, you have no bad months and no profit.

I cannot say if this down period is the start of a major slide, a temporary reset because the next gain, or a sidewise stumble that does not mean a darn thing.  Trying to time the market is impossible and usually wrong.  Trading commissions and market emotions are a bad combination.  You tend to buy when everyone is feeling greedy (market top, wrong time to buy).  You tend to sell when everyone is feeing fear (market bottom, wrong time to sell).  The broker (the casino) gets a paycheck every time you trade.  The broker’s revenue is many times larger than the stated commission.  They make money on trades several ways that are not called commission.

Sticking to the plan suppresses both commissions and emotions.    Several months ago, clients were beating on me to be more aggressive.  They wanted more stocks funds and less bond funds.  The market had a taste of greed.  I held the clients back telling them to hold to the plan. I told them increasing risk would increase the loss in bad times.  They acquiesced not because they were happy about my recommendation but because they trusted me (thank-you by the way).   Funny, no one contacted me this month telling me to increase their risk.  I have been contacted, however, by people feeling fear.

So what am I going to do now?  I am sticking to the plan.  I am looking at all portfolios to see if they need to be rebalanced.  I suspect that at this point, most portfolios are close to the allocations we agreed upon.  If the market goes down much more, I will rebalance to the agreed allocation.  What that means to you is that I will buy more stocks when market is very down and very frightened.  Rebalancing is facing into the emotional wind and spitting.  This discipline yields exceptional profits.   I will not rebalance unless the difference is significant.  I am not interested in Schwab making more revenue.  I am interested in you making more profit over time.

Please contact me with any concerns or changes in your situation.  I answer tax, accounting, or investment questions with all my heart.  If you have a question, probably most of you have a similar question.  If you have an idea for me to write about, even better.

Thank-you for your trust and your business.

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