February 2025
I try to put robust, resilient portfolios in place for my clients. Doing so will help them stick with their products and their asset allocation no matter what happens. Some say I am trying to time the market. I disagree. No one can time markets, but people can manage risk.
The global financial crisis of 2007 to 2009 taught me the advantages and limitations of a written investment policy statement. This is a formal document where the client agrees up front on what their strategic asset allocation should be and what a re-balancing should look like, among other things. The intent is to provide a structure and strategy that helps people keep their resolve. Focus and discipline are the hallmarks of successful investor behavior – in theory. The difference between theory and practice is this: in theory there is no difference, but in practice there is.
Anyone can say they are a behavioral coach who gets people to take a long-term view when markets are rising. But behavioral coaching poses a much greater challenge when people are panicking with fear. This is not about assigning blame about what I strongly suspect might happen; it is about pre-emptively doing what can be done to increase the chances of a positive outcome. I agree with the standard prescription of staying the course during market turmoil. And I specifically believe in maintaining a strategic asset allocation so people can re-balance to a target mix when one or more asset classes changes faster than others. For example, I believe people should sell some bonds to buy more stocks if stocks drop materially.
My concern is that, if my own experience of the 2007-2009 crisis is any indication, most advisors will likely fail in their self-described mandate to act as behavioral coaches. If markets drop significantly and/or stay low for a prolonged period, investors will likely lose their resolve – and there is little that principled advisors can do to prevent it. In short, I agree with conventional orthodoxy about what the right thing to do is. Where I break with orthodoxy is in my fear that many advisors will fail to get their clients to act accordingly. That is why I moved most client holdings from traditional stocks and bonds to alternative assets over the past few years.
In doing this, I’m channeling Odysseus in my own modest way. In Homer’s tale The Odyssey, Odysseus’ journey home after the Trojan War presented a great challenge: resisting the temptations of the Sirens. These creatures were beautiful women who sang so sweetly that sailors passing by could not resist their call…. and ended up crashing their boats on the nearby rocks as they attempted to get closer. He came up with a clever plan: he had his sailors tie him to the mast of the ship while they plugged their ears with beeswax so they would not hear the Sirens’ song. As such, Odysseus was able to hear the Sirens, but because he was tied to the mast, he didn’t give in to their call.
Moving to a new portfolio with a near identical risk / return profile, but with far less exposure to assets (i.e., stocks) that are trading at generational highs in terms of valuations, I’m attempting to pull off the portfolio management equivalent to putting beeswax into my clients’ ears. My hope is that when markets get choppy, clients will resist the temptation to sell because their portfolios will not be acting like most others. They will be better able to stay the course because they will have avoided exposure to that which might otherwise throw them off course. In short, I still believe in the longstanding principles of portfolio construction and management, but I’m also a realist.