Be Prepared, Be Resilient

Are You Ready?

So, markets are down, the oil price is seemingly in terminal decline, the (alleged) Ponzi scheme that is the Chinese economy is collapsing and interest rates are on the way up. A crisis? Well, for anyone who’s been around the markets for more than two minutes it’s déjà vu, all over again.

Of course, the wise investor is prepared for this; not merely in the sense of having a trading strategy in place, but in terms of psychological resilience. There’s no point being the best darned stockpicker in the known universe if you flee for the hills at the first sign of trouble – or, even worse, at the last.

Imperfect Strategies

During the not infrequent periods of relative calm in the markets you’ll find investors happily explaining their pet investing strategies: which are mostly based on whatever happens to be their particular personal preferences at the time. And, on the principle that a rising tide floats all buoyant objects, including those filled with hot air, many of these work a lot of the time. Unfortunately, they usually fail just when their guidance is needed most.

This isn’t – necessarily – a weakness in the strategies, it’s just that in emotionally driven markets there is no strategy that will deliver perfect results all of the time. Indeed, there’s an argument that any strategy that works in the long term must occasionally go wrong to shake out the feeble and fickle, otherwise it becomes a crowded trade and fails by definition.

So preparing for downturns in the good times is essential. How someone does that is a personal thing: you can hedge, or you can implement stop losses, or you can simply invest in stocks that will never fail completely and ride out the storm. Or something else – anything, in fact, as long as you have a definite plan, which you then track and learn from. The people most likely to escape from burning buildings or crashing planes are those who know exactly where the exits are.