My #1 Rule of Investing

We are not market timers, we are risk managers, which means we gradually adjust our allocation in accordance with a shift in those warning flags for the level of danger in the market.

Most money managers out there follow a blind buy-and-hold approach. That’s not a problem for investors in their 20s and 30s because dollar cost averaging will bail you out from any severe bear markets. But for someone in retirement or near retirement, the last thing they want to have happen is to ride through a bear market like we had in 2008. – Jim Stack – Stack Financial Management

Jim stack is a very successful advisor in Montana. He makes several key points here. You must understand where we are in the market cycle but, maybe more importantly, you must also understand how it relates to your particular situation in your investing lifetime. Slide your risk up and down with the market cycles and take into account if you have the runway to wait out any large decline. If you don’t – take less risk.

I have a friend, who is close to retirement; ask me last week whether he should sell stocks. I inquired as to how much of his portfolio was in stocks. He said 100%. Never have 100% of your funds in stocks! My #1 rule in investing is to never be forced to do something. If you are 100% in stocks and you need liquidity to pay bills and the market is down you will be forced to sell when stocks are cheap. This is when you should be buying.  Like Warren Buffett says you want to buy more hamburgers at the store when they go on sale.  What about the heavy emotional weight of being 100% invested in stocks? It will lead to mistakes. If someone is 100% invested in stocks they may waver when the time is right to buy because the losses have been so painful. He or she is more likely to sell and compound their losses when cheaper prices come because those losses will be so large they won’t be able to handle it emotionally. Always have options.

While the 50 DMA on the S&P 500 was support it has now become resistance at 2870. It will be important for the bulls to get back above that level early on in the week. The 200 DMA on the S&P 500 is now important support and that line is at 2776. Summer trading can very light and head either way but right now we are leaning towards the advantage going to the bears. Investors are getting frustrated by the dominance of the computerized trading and their response to different tweets. That may only further encourage traders/ investors to walk away as summer approaches and a lack of volume could create more volatility.

We have found over the years that it is helpful to look to the bond market as a key to understanding the future direction of the stock market. We had noted recently that the bond market looked as if it was getting stronger and that could mean that stocks were headed south. We have been getting longer in our duration and buying the 20 year bond ETF to lengthen our bond duration and more effectively hedge our equity holdings. It has worked pretty well so far and we don’t see a reason to change as of yet. Bonds have had a good run here and may be topping out soon but the bulls have the ball. We expect what could be coming is an extreme move in the bond market and, if it does, that may give us very clear expectations of what to do in stocks.

lighthouse

I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd  Blankfein

To learn more about us and Blackthorn Asset Management LLC visit our website at www.BlackthornAsset.com .

 

 

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill

 

Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.

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