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What’s your Bear-market strategy?


Managing assets based on a strict discipline gets to be a real pain sometimes. I’m looking at all the reasons to be market cautious and all my trend indicators turn positive. Because of the reasons I’ve mentioned above, I don’t feel so positive. My emotions tell me that the market is about to go bad, and I want my indicators to confirm my emotions. But they aren’t! So, do I listen to my heart and stay uninvested for the most part, or do I listen to what the numbers are saying and manage that way? It’s not even a question. That’s what risk management is all about. We want to be invested when the trend is positive and not invested when the trend is negative. That way of managing, though, hasn’t led to the best of returns of late.

With a stock market that, with precious few exceptions, hasn’t seemed to want to erode for more than a nanosecond at a time for years and years, now … the ‘siren song’ of some sort of perma-rally - whose only perceived risk to many investors is missing run-ups - has had an outsized allure. Consequently, many of them have casually discarded most risk-management guardrails on their portfolios; and even some advisors who manage their clients’ assets like us have begun to see risk-management as a nuisance, too - a notion merely keeping them from pleasing clients scrambling to wring every single penny from whatever remains of this aged Bull. As teeth-grinding a time as we have had of things in this regard … the one, at least one, gnawing riddle remains, no matter what: What’s your Bear-market strategy?

Market gains are a good thing. Nah; they’re a great thing. And when they seem to be delivered right to one’s doorstep with such irrepressible ease, well … they’re even better. When a feeling like that pervades investing, and has for so long, how does an advisor re-orient his clients’ thinking back to the critical need for the focused stewardship of a professional risk-manager? How about this… Rather than my harping on ‘risk management’ in a time where that may feel like an awkward anachronism to so many of you – perhaps we should think of it another way: While we want to make good market gains like any advisor wants to do; that’s not all we’re selling. It may not even be ‘the’ most important thing we’re selling! What we are selling is a way to “not give gains back!” And that takes insight that few have, and the intestinal fortitude that even fewer have … i.e., the discipline to make that wholesale in-or-out decision and take evasive action to avoid portfolio disaster when the time comes. While we cannot guarantee we will never lose, just like we cannot guarantee we will always gain, our strategies are designed to smooth out the returns.

I liken the risk-management maneuvers we make to an insurance policy (which we may never get a ‘return’ on, but we understand that those premium payments are a necessity, regardless); or a tornado siren (even though it may be a hassle to run down into the basement, we’re never actually disappointed when the house it still there after the warning passes … and we dutifully go downstairs, every time, because it’s simply unknowable at the outset whether ‘this’ siren, on this day, at this time, is a false alarm). Well, there’s an even-more elementary and compact way to put it. ‘Occasional disappointment is the price one pays to avoid out-and-out ruin.’ Invoking risk-management moves sometimes is overzealous, but only in hindsight. The market conditions that trigger these actions, in times where it really is ‘The Big One’ vs. a head-fake, almost never look any different at the outset … which is why, just like buckling that seat belt on a drive with no other vehicles on the road, or heading to the basement at the sound of a tornado siren - seemingly ‘for nothing’ again - are both actions which we neither ponder, nor allow ourselves the option of not doing. The occasional disappointment that ensues in the wake of certain risk-mitigating measures is the price we must pay to avoid out-and-out ruin in the long-term.


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