Accidental Speculation

When markets get tied in a knot over an issue like the debt ceiling, it’s helpful to break down investor’s decisions about how to handle it in their portfolios. Whether it is an investment in foreign currencies, shorting the stock market, selling everything or some other investment strategy that comes complete with a perceived safety net, it’s tough for investors to manage their emotions and the mixed messages they get from the media. I recently received a few emails on the subject of what to do as the shutdown continues. The answer, as you will see, is far simpler than you might think.

When investors attempt to move significant portions of their portfolio around, I think that is a form of SPECULATION. Yes, speculation. That is exactly what most investors DON’T want their investing to be about, yet in times of stress they do it without even realizing it. It feels good for a while, and then…kaboom! Bad things happen. You always have to ask yourself what happens if you are wrong in your guess. Investing large portions of your capital in reaction to the latest headlines is simply a frying pan/fire situation.

Besides, how do you know you are not already well-positioned for a dramatic shift in markets? Those of us who manage money for a living know that we earn our keep in large part by having a strategy to confront these major risks BEFORE everyone is talking about them. There is an old Wall Street saying that applies here – “what everyone knows is not worth knowing.” Everyone knows the government is not functioning a full strength and that there is a chance the debt ceiling will not be raised, triggering a so-called “technical default” (we have the money to pay our bills, but Congress won’t make the move needed to pay them).

People talk about this being an unprecedented crisis. As I see it, that honor was bestowed upon the events that occurred in 2008. This one has been a possibility for a long time, as political stagnation has been the rule for years now.

I am not one who believes blindly that the U.S. is the only market that is worthwhile to invest in. But our stock market is the most liquid form of organized investing I know of. The black or white rule applies, that is, there is no black or white in investing, only shades of gray. Making big moves to speculate on what may happen this month? Too Vegas-like for me.

My preferred solution for all times is to find a balance between owning stocks and shorting stock indexes. At times of heightened concern like this, we simply tilt more toward the short side, which allows us to get less of the downs or ups that will come soon. That is shades of gray, not black

and white.

Again, the biggest question to ask at this point (and the one that often goes unmentioned in the minds of those who react to headlines the way they think they should) is, if I speculate in the manner you are describing, and I am wrong, what happens? I suspect that you will not be happy in that case. Better to have a philosophy and investment process that is designed to consider calamities before they are screaming front-page headlines.

© Sungarden Investment Research

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