Tuesday, June 21, 2022
Sneaker waves. Sleeper waves. Rogue waves. Long-only is a dangerous proposition, especially when destructive financial waves roll in every couple years and destroy everyone's beach picnic. There has to be a better approach to avoid these wipeouts.
Consider, every approximately 54 months a -25% wave rolls through...and as a reader can imagine the LONGER you have been investing in the market, the LARGER this wave's impact is on your net worth. The word "catastrophic" is apt, especially if you take a sneaker wave on the cusp of retirement. Both your net worth, and potentially more damaging, your cash flow gets whacked. What is a financial farmer to do?
Consider what the Dutch and other low-plained residents near the ocean do: set-up early warning systems, act when triggered, and have ample ability to handle the inevitable overflow damage a rogue wave can cause. Early alert systems in your portfolio can be similar to Absolute Alpha, or trailing stops, or some type of macro trading which incorporates event-based triggers.
From one of my favorite movies World War Z: "First to know, first to act." There is no escaping the Pareto Principle, namely that these sneaker waves are out there and on average hit every couple years with devastating impact. Investors have several options. Do nothing and watch a long-only portfolio be destroyed like a sand castle. Use an early warning system and move your sand castle. Third, pick up your surfboard and paddle out.