As Marks has pointed out in recent interviews, though, baseball games can go extra innings and so can bull markets. If we are in the 8th inning, that doesn’t mean that we don’t have years to go before the eventual decline. As a result, this process is much harder than it appears on the surface.
2 – What do I do about it?
Ok, so we now agree we are in the 8th inning. But what actual changes to an investor’s portfolio does that imply? It is obviously different for every person, but Marks talks about figuring out what the standard risk level is for your portfolio and slowly moving it to a more defensive posture. Marks himself has utilized a similar approach for clients by staying fully invested, but reducing risk exposure.
There is an important lesson in what he is doing. Investors tend to want to make these bold “all in” or “all out” moves with their portfolios, but he is rightfully advocating the exact opposite. If you are going to try to adjust your portfolio based on the market cycle, the best approach is to make the moves slow and gradual. Timing the exact turn in the market is next to impossible and it is likely you are going to begin making changes well before the market actually turns. Even if you move gradually out of the market, it is likely to be tough to stick with the strategy when you inevitably underperform while the market keeps running. If you move out of the market entirely, it will be next to impossible.
3 – When so I change it?
The most challenging part of all of this is that the market is dynamic. So after we figure out what inning we are in and make our portfolio adjustments, we now face the issue of what to do when things change. What if we get a 10% correction? What if we get a full-on bear market? What if the market doubles from here? Changes in the market would call for going through this process again starting with #1. It would mean another judgement call about where we are in the cycle and a separate decision about what to do about it.
None of this is meant to say that the advice Marks has provided is bad advice. He is up there with Warren Buffett as one of the best at providing principles that help investors achieve success over time. For those who can figure out where we are in the cycle, can implement a slow and gradual process to update their portfolios to reflect that, and can stay the course when they are wrong for long periods of time, this can absolutely work. I just think most investors don’t fall in that camp. You can learn a lot from following legendary investors and billionaires. We have built much of our business at Validea on doing exactly that. But you also need to keep in mind that what works for them may not work for you. Trying to adjust your portfolio based on market cycles is one piece of advice I think most investors would be better off avoiding.
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