My youngest son is a member of a 4-H livestock judging club. Since he is too young to drive, I take him to the meetings and usually hang out to watch the proceedings. In a judging competition, the competitors are shown a group of four animals. They rank the animals 1 – 4 and then explain the reasons for their ranking to a judge. There is a lot of freedom allowed for the competitors to combine their imagination with technical jargon to come up with flowery descriptions (i.e. “flatter in his stifle” or “less condition over his loin edge” or “exceptionally long from the hooks to the pins”). Combining observation with verbal agility to argue your case is a nice skill to develop, but the reasoning isn’t enough by itself.
One thing the coaches emphasize over and over again is the need to get the big thing right. For example, if there is one animal that is clearly superior to the other three and one that is clearly the worst, you have to place them first and last. If you fail to do that, the creativity and sincerity of your reasoning won’t matter. If you get the big thing right, you have a chance to state your case and score some points, even if the judge disagrees with the rest of your placement.
When managing an investment portfolio there is one pair of things that you have to get right:
- Provide an avenue to growth.
- Protect yourself from disaster.
So that’s pretty simple.
Unfortunately, simple isn’t always easy. Providing an avenue to growth could be as basic as buying a handful of index investments or something vastly more nuanced and sophisticated. The number of ways to generate a positive return are infinite, and most of them can probably work under the right conditions. But putting a plan in place, any plan, is more important than fine-tuning an approach that is never used. Many people, particularly those that have taken significant losses at some point, become reluctant to put money at risk until the plan or the investment environment feels just right. Those just right moments are pretty elusive.
People that are reluctant to commit to an avenue to growth are usually afraid of disaster. This is a rational fear. Decades of savings can be lost in a few short months. It can also be lost in the grinding misery of a long bear market. It can happen, it has happened and it is happening in many markets all over the world right now. Protecting your wealth is as important as accumulating it in the first place.
As with ways to grow money, the number of ways to protect your capital is almost limitless. Everything from simple sell stops to complex hedging strategies can work given the right conditions. People that are reluctant to commit to a protection strategy usually aren’t afraid of disaster. They often fear not making the best choice. They will accept the risk of disaster in order to avoid the risk of underperforming a benchmark or a peer group. A professional money manager may be able to make a case for this (although not in front of a client), but for the individual investor, this fear irrational. The harm of leaving some money on the table pales in comparison to the harm of actually losing a large percentage of your nest egg forever.
Provide an avenue to growth and a method of protecting yourself from disaster. This is the important pair of things that you have to have. Most strategies have factors that can be improved, ways that they can be fine-tuned and optimized and made more efficient, but failing to get the important pair right could render these efforts meaningless.
Disclaimer: Past performance is not indicative of future returns. Information displayed is taken from sources believed to be reliable but cannot be guaranteed. All indexes are unmanaged and investors cannot invest directly into an index. Ideas and opinions expressed in this article are the sole responsibility of Patrick Crook/PLC Asset Management and do not reflect any stated opinions of LLP Financial LLC or any other person or entity.