Why Trying To Avoid Every Dip Is A Fool’s Errand

The unprecedented volatility to start the year has brought out nearly every type of expert opinion on the best way to ride out the storm. I have heard arguments ranging from “stay the course” to “this is just the start of the crash”.

Let me be clear by saying that absolutely no one knows what is going to happen over the next three to six months. We could be another 20% lower, 20% higher, or virtually anywhere in between. Anything can happen and to have 100% conviction in just one outcome is the sign of someone who is completely unhinged from reality.

The consensus seems to be that we are already in a bear market based on the average publicly traded U.S. stock having fallen more than 20% from its 52-week highs. The SPDR S&P 500 ETF (SPY) is only down about 12% from its all-time peak, but that is generally an anomaly based on the strength of a few large stocks in the market-cap weighted index.

So now that we are getting all kinds of expert advice on riding out a bear market, I felt it’s a perfect time to talk about how to avoid a dip in your portfolio. It’s simple really – you don’t invest in stocks, bonds, commodities, or any other investment short of a guaranteed money market, savings account, or CD.

The only risk in those instruments is that you aren’t going to be able to survive on the meager amount of income that they provide. But you will be safe from all but the most horrific meltdown of the modern financial system.

For those who are actually trying to grow their money to save for retirement, generate an income stream, or keep up with inflationary forces, you have to realize that there is a risk in every market. If you shift from stocks to bonds, then you are simply transferring the volatility to different forces – i.e. business risk to interest rate risk. There are risks in buying oil, gold, real estate, or virtually any other asset class.

If you take out all the risks by moving to cash, then you simply have shifted to the risk of lost opportunity in the event the investments you sold suddenly rise in value. That is the trade off to using stop losses or selling into a capitulation-style event that scares you out of the market.