The other meaning is strategic. First figure out whether or not it is suitable for you to take defensive action with your portfolio (for me it is suitable) and then figure out the right way to do it (I prefer relying on the S&P 500’s 200 day moving average) and then sticking to it. That last one is the toughest one for the reason we talked about above. People often come emotionally unglued in the face of declines. In the past I’ve talked about a former client who worried a lot about every decline and invariably the conversation ended with my reminding him that he’d been through more declines than I had.
The other quote to mention comes from Tad Rivelle of TCW who said;
At some point, we are going to be living with significantly higher rates than we have today. Fed policy is suppressing rates. That, in fact, is the whole point of zero rates or quantitative easing. As a consequence, market forces aren’t able to express themselves fairly and properly in the interest-rate market. We do not believe that what the Fed is doing is ultimately going to take us to a better place, so we’ve reined in the portfolio’s duration over several years, and we are defensive when it comes to corporate bonds and high-yield securities.
How much risk are you taking in the income portion of your portfolio? The answer to that question is less important than whether or not you know how much risk you are taking. There’s nothing wrong with loading up on volatility and risk as long as you know you’re doing it.
There is no way to know whether there will be severe consequence as implied in the above quotes but whenever the next really big decline comes for stocks and/or bonds we know certain things; people will over react and panic because of how different it will be. Take the time now to do what you need to avoid being part of that group.
This article was written by AdvisorShares ETF Strategist Roger Nusbaum.