The Wall Street Journal carried a long article by Michael A. Pollack titled, “What Are You Afraid Of.”
In this piece, Pollock discusses impending market risks and suggested strategies by several experts on how investors can deal with certain adverse events. The article covers seven “what if” scenarios: Stocks take a dive, natural disasters and/or war spark a market panic, interest rate hikes, continuance of low interest rates, deflation, inflation, and another European fiscal crisis. That’s quite a line-up.
The article’s sub-title, “You can take steps to cushion your portfolio against the risks that worry you the most,” prefaces pages of advice covering dozens of defensive strategies and actions that investors need to consider.
While I have no quarrel with the article’s content, Pollock’s a knowledgeable financial writer, I am reminded of the following. In my forty years of personal and professional involvement in the investing field, I’ve experienced all of these nasty seven scenarios; and, some of them, more than once. I also suspect that much of the investing public isn’t afraid of just one of these events, but all of them! And, not just now, but on an ongoing basis.
The truth is that investing involves risks, and one or more of those cited above will always be with us. Savvy investors deal with these “fears” by being prudent investors who appropriately balance risk and return in high quality investments that have staying power over the long haul. I like to think of myself as that kind of investor. And, I have to admit that I’m more inclined to view a major market decline as selective buying opportunity rather than as a reason to become defensive.
The truth is that if you have a long-term investment plan and a solid portfolio, this strategic combination will serve you well through both the good and the bad times in the market. Of all the many market moves and tactics suggested by Pollock’s sources, there’s one that’s missing. Most of the time when the market turmoil and “noise” are at their worst, the best action to take is no action. In other words, doing nothing becomes the something to do! I both practice and preach this advice.
If you’re not convinced of the efficacy of the “do nothing” strategy, you must read investment author and commentator, Carl Richards’ article, “In Soccer and Investing, Bias Is Toward Action.” You can access this insightful gem from his May 13, 2013 posting on his Making-the-Most-of-Your-Money blog here.
Richards bases his informative and entertaining analysis of investor decision making on a serious academic study that appeared  in the Journal of Economic Psychology, “Action Bias Among Elite Soccer Goalkeepers: The Case of Penalty Kicks.” Here’s an excerpt from the study’s Abstract:
In soccer penalty kicks, goalkeepers choose their action before they can clearly observe the kick direction. An analysis of 286 penalty kicks in top leagues and championships worldwide shows that given the probability distribution of kick direction, the optimal strategy for goalkeepers is to stay in the goal’s center. Goalkeepers, however, almost always jump right or left.
Without going into the somewhat boring statistical details of the study, Richards provides this convincing conclusion: “[the results show] … that goalkeepers could almost double their save percentage by doing nothing. In other words, just standing there was the optimal strategy.”
Given the problematical investment environment we are currently facing, Richards’ keen observations on investor behavior in these circumstances are extremely valuable. His soccer goalkeeper metaphor might save a lot of individual investors money and avoid the agonizing consequences of “jumping” in the wrong direction.
Richard Loth is the founder and publisher of the Fund Investor’s Schoolhouse, a mutual fund investing educational platform for individual investors (www.fundschoolhouse.org).