Think of the company you work for or that you are the owner of. Has it happened in the past that a grave error has cost some serious money or, in the worst case, even a human life?
If so, I am certain that the event was analyzed, new processes were set up and/or procedures put in place to avoid a reoccurrence. It’s sensible, because doing nothing would bring into play Einstein’s definition of insanity: “Doing the same thing over and over again and expecting a different result each time.”
But that is exactly what the majority of investors are doing. Investing is a business as well where money is at stake, whether you make your own decisions or have someone do it for you. Yet investors don’t treat it as such, otherwise, they would not be making the same errors over and over again.
You know where I am going with this. If you participated in your first bear market in 2001, and lost your shirt, from a business point of view, you should have made adjustments subsequently to avoid a repeat disaster from happening.
While that would have been sensible, it is not what most investors did, isn’t it? Memories are short; no different investment methods are employed, and a few years later (2008), the same thing happened again. It’s insanity at its finest.
Of course, when all you ever hear is buy and hold, diversification, non-correlation of asset classes and other terms, it’s no wonder confusion reigns. On the other hand, thanks to the internet, it has never been easier than nowadays to research and find other investment approaches that attempt bear market avoidance.
A few days ago, I spoke with a new potential client who has portions of his (substantial) portfolio managed by 3 different advisors—all following slightly different approaches to trend tracking and all avoided the brunt of the bear market of 2008. To be clear, this does not mean, he will never experience losses, it merely means that procedures and processes are in place to avoid the big market drops.
He is looking to add another advisor advocating trend tracking to his stable—how is that for the ultimate in diversification and portfolio safety?