When Perceptions Change, Should Your Portfolio Change, Too?

The markets were surprised by Trump’s tweet last Sunday declaring he was raising tariffs from 10% to 25% on the initial $250 billion of Chinese imports…and implementing tariffs on the remaining $300+ billion as well.  

However, this should not be a big deal to many of our readers. Those who don’t need cash right now are just fine. 

Here’s the plain old, straightforward truth…We don’t know what will happen, nor does anyone else. As investors, we must all hope for the best while continuing to plan for the worst. 

Investing Behavior

We all know by now that uncertainty surrounds us here in investing land.  Learning to accept that is instrumental and important when creating an investment strategy. I’ll go out on a limb and claim (admittedly with zero factual evidence to back it up) that every investment strategy ever invented has bombed at one time or another even if it has been successful over the long run. That includes the strategies at Monument along with the strategies created by the smartest investors out there. Even Buffett.  

Why? Because of human behavioral traits. We all have them. They are fostered by the racket we are exposed to on a daily basis.   

Learning to filter out the racket is key. Some things are important, and a lot of things are not. This last week was a perfect example. We’ve had a great market and that puts everyone on the lookout for a pullback…it’s the “itchy trigger finger” syndrome.   

I think we’ve experienced a lot of over-reaction to news that has no immediate discernible outcome.  

In other words, what’s changed? I know there is a lot of speculation that things COULD CHANGE, but really…what’s changed?   

What HAS really changed? Perception. To some—let’s call them the “undisciplined” or the “impatient” investors—perception means everything.  To others, it means nothing. 

If you have a well-diversified portfolio, there will be a time when you hate something you own. But for those of you who have come to terms with that, you have an advantage. You’re like the casino that wins over the long-term because the odds are in their favor 51/49. Time and statistics are on your side.  

As situations arise things can and should adjusted if the answer to the question, “What’s the money for?” changes. But investors must avoid the natural tendency to “do something” when the news noise gets loud. Those who get caught up in trying to time the market or adjust based on changing perceptions will wind up driving their portfolios into poor overall returns. 

For a refresher, please read the “What to Do Now” section found at the bottom of this post from December 20th, 2018. Do you remember the markets back then? Oh hell, go read the whole thing again, it’s one of our top–rated blogs of the last 12 months.  

Perception or Reality?

To conclude, I have a few thoughts based on the slides below. (Data is as of the end of April 2019.) I’ll keep the commentary to a minimum…just look and ask, “What has changed—perception or reality?” 

 

 

The last slide is the “shit happens” slide. Okay, fine…I do have some comments, I can’t help myself.  

Every 

Single  

Year. 

Something 

Shitty 

Happens. 

Just look at the red dots and the section of the slide that reads, “Despite average intra-year drops of 13.9%, annual returns are positive 29 of 39 years.”  Those are good odds, especially when you consider that casinos make huge profits off a 51% advantage. 

MONCON Recession Watch

We are still at MONCON 5 for recession watch. If that sounds like a broken record, good.  It should. If you were trying to adjust your portfolio over the past 6-8 months based on noise and changing perceptions, you probably got hurt in the market.  For those of you ignoring it (like the MONCON model does), you have stayed in the market and have probably made money despite last December and last week.    

Keep looking forward.

Dave

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