In the waning stages of 2014, investors are starting to look closely at their returns and analyzing the pros and cons of their portfolio decisions this year. Overall, the gains have been solid across the board for stocks and bonds with the exception of some errant sectors that have been misplaced. Energy stocks, precious metals and commodities have been the focus of wrath from the inflation camp and continue to prove that trends matter.
The real losers this year have been those that have either bet against the market or taken their chips off the table too soon. Attempts to call a top in stocks or bet on rising interest rates have been fraught with failure despite the noble goal of capital preservation.
One of the hardest things with sidelining your capital is deciding if and when to get back into the markets. Even a perfectly timed sell at a market high is a fruitless endeavor if you don’t buy back in at lower prices or reallocate to another asset class that is signaling a more attractive opportunity. You are simply defeating the purpose of active management.
I fully understand the argument to be had that stock valuations are too high, the Federal Reserve is going to raise rates, social unrest continues to rule news cycles, economic calamity is striking other continents. The list goes on and on in an endless wall of worry that headlines websites such as MarketWatch that prey on your fears.
The thing you need to remember most is that fear is not an investment strategy. Fear leads to emotional decision making that rarely results in a positive outcome. Regardless of the short-term relief that it can provide, capitulating at a low or buying at a high is a high risk/low reward proposition.
I’ve said it before and I’ll say it again — the market isn’t logical, it is psychological. It will suck you in at the wrong time and spit you out when everything seems great. For that reason alone, it’s important to take a counter intuitive mindset to manage risk and still maintain a cogent asset allocation at this stage of the game.
You can’t control the outcome of the markets on a short-term basis. What you can control is your asset allocation, security selection, trading levels, and information bias. That last point is probably the most important, as controlling the fire hose of opinions and information that we are bombarded with on a daily basis is paramount to success.
Make sure those you trust with your portfolio decisions are on the same side of the table as you are. If you have made mistakes in the past, rectify those by evaluating your decisions and prepare an action plan for success in 2015. The cost of sidelining your capital for another year may well prove to be another fruitless endeavor that erodes the greatest asset on your side – time.
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