Defense Wins Championships

Public domain image courtesy of John Van Winkle via Wikimedia Commons

Public domain image courtesy of John Van Winkle via Wikimedia Commons

Investors often take the words “defensive” or “conservative” as code for “being willing to accept small returns.” The truth is, playing defense can be the easiest way to boost your returns.

Most investors focus on offense. Finding the next Tesla or Google. Trying to figure out which sector will benefit most from next week’s GDP numbers. Who’s going to beat estimates and by how much, etc.

The problem with focusing solely on offense is that it’s almost impossible to possess an advantage. You use the same information to try to find the same opportunities as everyone else. For example, Continue reading

Q&A: Are Stop Loss Orders Really Necessary?

So I understand that stop loss is used to protect gains/limit loss. But is it really necessary like during a time of crisis? Example: I buy a share of company A for $100 and put a stop loss at $90. Stock closes at $101. Something occurs in premarket, and stock goes down to $80. How has that protected me when it sells at the market open when everyone else is frantically selling?

In the example you’ve outlined, it hasn’t protected you, at least not in the manner you were hoping for. I am an enthusiastic proponent of setting pre-defined protective exits, but will be the first to tell you that they are not perfect.

Investing is a process of making decisions in an environment of uncertainty. Everything we do is a tradeoff. For example, a stop loss order on an ETF of technology stocks will be more reliable than a stop loss order placed on a single technology stock. Which is more important to you – Continue reading

Q&A: How much cash should you keep in your portfolio?

How much % cash (dry powder) do you leave in your portfolio? As a general rule, one should always save some dry powder for good buying opportunities. How much reserve do you usually keep in your portfolio?

I think there are two reasons to hold cash in an investment account:

1. To fund regular monthly/quarterly withdrawals (source of income).
2. If the alternative to cash is a bad bet.

For this discussion, let’s just focus on the second reason. I disagree with the idea that you should always save some dry powder. When good opportunities present themselves, there is no reason to pass them up in favor of some vaguely defined better opportunity that might come along someday.

It’s important to acknowledge that the best opportunities are almost never obvious in advance. If you lay in wait for an ideal circumstance where everything feels just perfect, you will be waiting for a very long time. Fortunately, we don’t have to find perfect investments – we just have to find investments that are superior to cash.

For example, let’s say that my asset allocation plan dedicates up to 20% of my portfolio to Continue reading

Q&A: What would you consider a good investment outcome?

At what percentage would you consider the investment a successful one and begin to look for an exit point? I am aware this hinges on a lot of variables but let’s just make an approximation.

When making an investment, I am looking for one of four possible outcomes:

• A small loss
• A small gain
• A medium gain
• A large gain

A successful outcome would be one of these results. To understand why these can all be considered successful, let’s turn your question around – what is a bad investment outcome? Continue reading

Q&A: I Have Too Much Cash but I Am Scared of the Market, What Should I Do?

I have too much cash but I am feeling scared to put it into the market, what should I do?

Here is my current portfolio breakdown:

• Cash 16.5%
• International Bonds 0.8%
• US Bonds 1.7%
• International Stocks 21.8%
• US Stocks 56.7%
• Alternatives 2.5%

I know I need to dump that cash somewhere as it is growing mold and inflation will eventually eat it. I am just not sure where I should be putting it. I know it is bad to time the market but I personally feel the market will be coming down soon, and I don’t want to throw it all in along with my other cash. But I don’t want it to sit either.
Where is best to put it for the time being? CDs suck, Savings suck. What is best?

Decision paralysis is usually the result of not having an adequate plan. Your asset allocation indicates the presence of a partial plan, but it’s missing an important piece.

The missing piece is the part that that protects you from being wrong, which is a perfectly natural consequence of making decisions in an uncertain environment. Every investor spends a lot of time being wrong because the future of complex systems like markets and economies is unknowable. Being wrong is OK – if you plan for it.

For example, let’s say you found something you’d like to invest in but were nervous about the overall valuation of the market Continue reading