It's a Zoo Out There

Recent market activity reminds me of an old saying in the investment world. Bulls make money and bears make money, but pigs get slaughtered! The saying depicts a history of sad endings for investors who disregard risk in their pursuit of bigger and faster gains. Let me explain.

Bulls describe investors who are optimistic. They rarely take profits when the stock market is moving up, preferring to keep their profits invested in a bid to reap even bigger profits. However, this strategy also places bulls at greater risk of loss in a market downturn. Because markets historically spend more time moving up than down, bulls tend to make money over time in spite of, or perhaps because of their ability to handle risk. Hence the saying "bulls make money"

Bears describe investors who are pessimistic. They tend to invest more conservatively, sometimes avoiding the stock market all together. Their more conservative investments tend to make less in an up trending stock market. However, conservative investments also tend to lose less when the stock market moves down. It turns out over time making less in up markets and losing less in down markets also tends to be a (relatively less) profitable strategy. Hence the saying "bears make money".

My personal experience is most of my clients fall somewhere between being a total bull and a total bear. Clients often tell me they want a portfolio that aims for "moderate" long term returns with a "moderate" level of risk. Of course, everyone has their own understanding of what "moderate" means. For this article, let's assume a theoretical client's moderate investment plan consists of keeping 30% in relatively conservative investments to help dampen the volatility of more aggressive holdings. The client's plan gets implemented and is on track until the pigs show up.

Pigs represent that little voice inside all of us that we hear following large stock market gains. The pigs remind us of all the extra gains we would have experienced if we had just been more aggressive. They downplay risk. They implore us to chase what's hot, ditch under performing assets, and above all dump that 30% in conservative investments. Why would anybody want 30% in boring, under performing, conservative investments anyway?

Of course the fallacy of this argument lies in the answer to the question. Those conservative investments are an intentional part of a plan designed to mitigate risk. Their first and foremost function is to provide an anchor when stormy markets eventually and inevitably come. For bears they give a measure of security needed to avoid panic selling in downturns. For bulls they provide a set aside reserve needed to execute a buy low strategy after a market drop. Bulls and bears that stick with their plans tend to live to see another day. Pigs that ditch their plans, ignore risks, and chase the dream always seem to end up as bacon. Don't listen to the pigs!

The opinions in this material are for general information only and not intended to provide specific advice or recommendations for any individual. There can be no guarantee that strategies promoted will be successful. Investing includes risk, including fluctuation prices and loss of principal.