Ride it out....is not a strategy. It's a tactic. 3 Critical Investment Plan Aspects for Managing Volatility

• I'll just ride it out.
• I'm in it for the long term.
• If you liked it at $50, you should love it at $40
• Diversification and time will fix everything.

These are some of the responses that many hear or read about, especially in the midst of a tumultuous market.  More often than not they are the result of a lack of strategy and a reaction to uncertainty.

Like most important things, especially in business and/or finance.  There needs to be an overarching plan.  I prefer to break it down this way:

1. The goal - What do I want to accomplish.  What place, position or situation now or in the future is the purpose of my effort.
2. The strategy - How do I want to do it and what tools are available to aid in my progress.
3. The tactics - what are the disciplines and methods I (or trusted advisor) will implement or use in the process and when dynamics change.

 For most investors, they invert their approach.  The goal may be what initiated the endeavor, but the tactics are now driving the strategy and subsequently affecting the goal.

When investments markets convulse and create both pain and opportunity, tactics should already be in place to affect the strategy.  The default of do nothing, while not necessarily bad, isn't usually a tactic.  It's a lack of one.

For instance; allowing a portfolio to just ride it out and drop 20% may in fact work over a long period of time, but the problem is the mathematics have now positioned it for needing superior results.

The math of loss is a hard pill to swallow.  A -20% loss requires a +25% gain to recover.  A -30% loss requires a 43% gain.  You get it.  Minimizing losses, prevents requiring maximizing profits.  The later in the timeline of saving, the more detrimental this reality becomes.

An analogy I use: Never let your V8 become a 4-cylinder.  It may still do the job, but you have lost your Horsepower to do the job well.  This doesn't require crazy risk or expensive insurance products.

If you are invested in broad mutual funds, whether in a 401k or the like, it can be a bit more difficult.....and worse, an individual investor is now subject to the emotions of all the other shareholders.  If that fund is getting redemptions, that fund manager is now a net seller in a market that should soon become a buyers market.  Often, mutual funds get money when there isn't much to buy and have to give it back when good names go on sale.  By the way, if a mutual fund is owned in a taxable account, prepare yourself for a cap gain at the end of 2020.  Managers will be forced at some point to sell their big winners to meet redemptions if this keeps up.

Take Google for instance.  The largest and longest holding of our clients.  Here is a chance to average UP.  Yes, you read it right.  Many times a great stock will be one that we have a hard time adding to as it moves higher, fearing we will dilute the return and only detract from its performance.  I don't have intentions of selling GOOG in a rough market, but I can trade around it.  Adding to my position, I still have a large net gain and if it moves higher I can trim it again as risk management.  Also, trading similar but not the same name.  For instance, if we own MSFT, I can trade CSCO or INTC (all three trade w/ hi correlation), even short them to lock down the allocation.  This "pairs trade" prevents the portfolio from feeling the weight of down market, but maintains my chance of treading water until I can cut loose the sister position.

One way to think of managing risk is by making tactical investments to offset this volatility and neutralize the portfolio.  Picture a large boat in rough seas.  Boats take on ballast by pumping water into the hull to prevent the rough seas knocking the vessel with each wave.  The heavier boat has reduced speed, but can handle the "chop" much better as it tends to go through the wave rather than being tossed over it.  There are investment tools available via various Exchange-Traded Funds that allow us to bring on "ballast" to the portfolio for periods of rough seas by taking a proportional position in an offsetting manner to buffer the storm, and simply empty the weight when calm is on it's way.  Doing this allows us to stay in the boat, keep our direction intact and stay the course.  Rough markets don't require "abandoning the ship", nor does investing demand getting sea sick to accomplish final arrival.

Having different tactics for different types of market dynamics doesn't necessarily change the strategy and shouldn't change the goal.  In fact, the goal is what should drive all that is done. At M2, we are committed to the concept of stewardship.  Goals, personalities and needs are different.  We are merely handling resources on behalf of another who needs help with strategy and tactics.  Stewardship is our guidepost that under-girds our work of managing risk on behalf of others.