Sunday, May 15, 2011

THE PERPETUAL WALL OF WORRY

by Cullen Roche

Here’s a nice chart from Fidelity Investments showing the perpetual struggles that the global economy and the equity markets have endured over the last 40 years. It shows that economies will enter substantial periods of hardship, however, if the citizenry are moving in the right direction, they are likely to continue making progress. After all, when taken to an extreme that is the story of man. We innovate, overcome, survive.

Many readers might think of me as a pessimist because I tend to focus on the negatives. As I’ve described before, butterflies and rainbows don’t ruin your day. It would be easy to focus on the positives during the climb to the top of the investment mountain. But it’s not the butterflies and rainbows that get in your way. It’s the loose rocks. And if you’re not keeping an eye out for them they’ll ruin more than your day. In managing your downside risks you actually increase the odds of greater upside.

And while this isn’t an advertisement for “buy and hold” or similar approaches it is an advertisement for common sense and good risk management. Common sense says that mankind will always wake up in the morning attempting to be better than he/she was yesterday. Fighting this powerful trend through persistent pessimism might pay-off in the short-term, but it is guaranteed to lose in the long-term. And a good risk manager knows there will be bumps along the way. Plan accordingly.

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