Walking my dog through the neighborhood last week, I came upon a friend who gave me his standard greeting for these occasional chance walk-bys: “What do you like in the market right now?”
He knows I’m not handing out stock tips, but he usually follows it up by name-dropping, or we’ll spend a few moments talking about attractive sectors and industries.
This time, however, I shot back “Why don’t you ever ask me what I hate in the market right now?”
“Because,” he explained, “I wouldn’t want to own anything you hate.”
I stopped walking and asked “Do you really love everything in your portfolio?”
His immediate answer was that yes he does, but when I asked him about the unexciting things he owns – in his case, that would be bonds, some precious metals and more – he fessed up to not being so enamored of those holdings.
“That’s good,” I told him. “Everybody should own a few things that they don’t like owning so much, especially now.”
It’s a premise worth considering, especially at a time of heightened volatility, nervousness and changing expectations.
For the purposes of this discussion, however, we need to define what it means to love or hate an investment.
You should never fall in love with an investment, getting moony about how well it has done and letting the emotion of past success cloud your judgment and overcome reason.
All too often, investors let their winners run, winding up with portfolios that are improperly diversified and over-concentrated in a few issues; alternatively, people hang onto past winners the way they might cling to an old love relationship, arguing that the mutual fund or stock “was good to me once,” rather than focusing on whether it’s a good choice for the future.
Taking the emotion out of it, however, you should love at least the idea of the investments you are making. If you’re not excited about where you are putting your money, it’s hard to build up the market courage and emotional discipline needed to ride out the twists and turns.
On the flip side, there is always some hate for investments that have lost money, but that again falls on the emotion of having been burned by a bad choice or timing.
If you dislike an investment because it has disappointed you and you wish you never purchased it, that’s probably something worth selling. Moving away from investment mistakes is a good portfolio discipline to have.
Even after you remove those emotion-triggering losers, however, there’s a good chance that you are left with a few investments that are discomforting, things that don’t excite you much, but which are required building blocks in a diversified portfolio.
It’s not easy to get excited about something with pedestrian returns.
Yet in many cases, those staid, boring, unexciting investments are like medicine; you don’t like the taste, but once you swallow and move on, you get over it and can start to feel better.
Right now, depending on your attitude, there are plenty of investments to dislike out there.
The market exited November in a bit of a funk, reminding investors of how uncomfortable a downturn feels – even a small one – putting them the edge. My friend and neighbor, for example, noted that “he doesn’t love the stock market right now.”
Over the years, there have been plenty of times when market experts have talked about how they expected trouble ahead, but they weren’t willing to leave the stock market until they were sure the troubling times were upon us.
Even if you are trying to time the market, it’s time in the market that matters most.
Likewise, bonds and bond funds mostly have been unattractive investments for years now, struggling in a near-zero rate environment.
And that was before inflation kicked up; with the cost of living rising at rates that haven’t been seen in decades, it’s impossible for many fixed-income investments to keep pace.
Gold and precious metals – the traditional hedges for inflation – have been largely disappointing at playing their role too.
And still, bonds and low-yielding money-market funds and bank accounts fit into a portfolio, even if their primary role is as a parking place so that all of an investor’s cash isn’t exposed to stock market risk at a time when volatility is on the rise and conditions look less hospitable.
Most forecasts amount to educated guesses, so whatever information you rely on to make your decisions should be treated in that same vein, as if it is informed but not guaranteed. The best way to hedge those forecasts is almost certain to involve investing in things that aren’t exactly your faves.
Your dislike may not run to the level of hate, but spreading your assets into the things you dislike is its own form of insurance.
Nobody really enjoys paying for insurance; in fact, the general hope of someone buying insurance is that they will never be forced to make a claim.
You do it because it’s the right thing.
So look at your portfolio now and consider if you have enough things you dislike in there.
Further, look to add investments that you can love to hate.
For example, closed-end funds frequently trade at discounts, meaning there are opportunities to buy some bond/fixed-income exposure at bargain prices. You may not love having to sacrifice market potential for safety, but at least you’re not paying full price to do it.
If you love everything in your investment portfolio – especially at a time like this when conditions hint at a possible decline or recession at some point in the next few years – make sure you’re are diversified properly.
Otherwise, whenever the market rolls over and the bull market comes to an end, you’ll wind up hating your portfolio at a point where it’s too late to avoid the pain.
Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at firstname.lastname@example.org and tune in at moneylifeshow.com.
Copyright, 2021, J Features