Not the time for cruise control
– Jeff Meissner
We often use this story to explain how three of the strategies that we manage at Balanced Asset Management (the Active Strategies) move up and down the risk spectrum as market conditions change. While most investors use a “buy and hold” investment strategy, we think that’s a bit like buying a car without a brake or gas pedal – only cruise control.
The concept behind “buy and hold” is you decide how much risk you are willing to take, diversify your assets accordingly and hang in there during both good and bad times. If you decide you want to take a moderate amount of risk, most investment professionals would diversify you by placing about 60% into stocks and 40% bonds. This would be similar to getting into your car to take a 1,000 mile trip and you decide you are a moderate driver so you set your cruise control at 60 mph. Cruise control works great if it’s 70 degrees and sunny but what happens if a storm pops up like in 2008. All of a sudden the road became very slippery.
In 2008 you are in your car with the cruise control set at 60 and you come around a bend in the road and you see flashing lights up ahead. You don’t have a brake pedal so you just keep cruising along at 60 mph. In 2008 that diversified, moderate investment portfolio crashed and burned.
If you are driving a car with a brake and a gas pedal and it’s 70 degrees and sunny out, you could take advantage of the perfect weather and maybe drive a bit faster to take advantage of the great conditions. But then when you come around the bend in the road and you see the flashing lights of possible danger ahead, you could tap your brakes. As the danger ahead becomes more evident, you could tap the brakes again and again until you realize there is a huge pile-up in front of you. Instead of just plowing into the accident scene, you could pull over to the side of the road and wait for the debris of the 2008 stock market crash to be cleared up.
After the road clears we don’t just “floor it” and accelerate wildly. First we go 10 mph and then 20. Slowly accelerating the same way we slowly decelerated because we want to make sure the road is safe before we start going 60 mph again.
The Active Strategy investment philosophy is to adjust the amount of risk in the portfolios based on the current conditions. We use both the brake and the accelerator to get you to your destination as safely as we can.