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As in life, having a plan B leads to success in investing Print PDF
As in life, having a plan B leads to success in investing

 

April 17, 1970. It had been four tense days as the world held their breath and said their prayers. It was to have been the third landing on the moon, but fate intervened when an oxygen tank on Apollo 13 exploded. Oxygen, water, and energy were suddenly in critically short supply. Not only was the moon landing aborted, but the return of the three-man crew was seriously in doubt.

The two previous moon landings had been incredibly successful. They had gone off as planned. No major surprises were visited upon the crew. They had gone by the book.

But Apollo 13 was different. The oxygen tank explosion had rendered the service module unsustainable. The crew had to retreat to the lunar module, the portion of the spacecraft normally used solely to land on, and later take off from, the moon. It would now serve as a lifeboat for the remainder of the journey.

Until the return to Earth, the crew, mission control, and the engineers at countless NASA contracting firms worked to solve one critical issue after another. First, it was simply survival. How could they preserve sufficient water, energy, and oxygen to return to Earth?

Then it was how to get home. Did they have enough fuel to turn back, or should they let the moon’s gravity slingshot them around its backside and send them home? They chose the latter and at one point found themselves the farthest from Earth any humans have managed to be, a record Apollo 13 still holds.

Along the way back, they had to create new ways to eliminate the unanticipated buildup of carbon dioxide. They had to recalculate their return trip, at one point using slide rules. The descent engines of the lunar module, designed to land them on the moon, were reconfigured to do a correcting burn to return them home and then make course adjustments along the way.

In a plan B triumph, on this day in history 47 years ago, Apollo 13 and its three-man crew successfully touched down on Earth.

Of course, this real-life story has an investment moral. I think it should cause all of us to ask, “In investing, what’s our plan B?”

Like the first two lunar flights, buy-and-hold, by-the-book investing can work … until a crisis develops.

Buy-and-hold investing flies in the face of so many of the rules that we have learned should govern the rest of our lives. For example, we believe that working hard yields better results in most endeavors than just sitting back and hoping for the best.

It’s the ant and the grasshopper story from our youth. The ant works all summer as the grasshopper whiles away the hours. Who survives the winter? Active investing seeks to emulate the ant—buy and hold investing—the grasshopper.

Similarly, we are always told that no matter how good plan A is, we should always have a plan B. But buy-and-hold investing has no plan B. You buy. If the economy prospers and the market rises, you hold. But if the economy falls apart, you hold. If the market goes down 10%, you hold. If it falls 10% more, you hold. If it’s down 50% to 75%, like some stock market indexes in 2002 and again in 2008, you still hold.

An active investing approach is responsive to the message of the markets. It’s attentive to the unexpected indicators—the signals that its price action is constantly sending. It can react to crises. And it can take action to rescue the present trade, and mitigate the losses.

Buy-and-hold investing is just one strategy. We believe that the best investing does not follow the tenants of a single strategy. Not only does buy and hold not have a plan B, but there is no plan C or any other variation. It’s one approach. And you must live or die by it.

In my experience, in investing and in life, following multiple active strategies offers the best chance to deal with life’s uncertainties. We have learned in finance that one of the best defenses against uncertainty is diversification. However, in the past, financial advisors have limited that diversification to simply creating portfolios of different asset classes.

While that can help when the asset classes are truly diversified—like stocks, bonds, and gold are most of the time—what we have repeatedly learned from the market declines of the past is that when a true financial crisis hits all asset classes go down together. Asset-class diversification often does not help when you need it most.

If instead of just diversifying by asset class you diversify by actively managed strategies, you give yourself many options in dealing with whatever the market throws at you. Because some of those active strategies can actually go short or inverse to the market (true diversification), a portion of your money may have a chance to work for you during a decline if you hold a portfolio of different active strategies.

Strategic diversification is an important weapon against uncertainty that buy-and-hold investing just does not have. Buy-and-hold investing is like a football team that has only one defensive play, a baseball team that only sends one fielder out onto the diamond, or a golfer who approaches the course with a single club in his or her bag.

What if Apollo 13 had used just one strategy to return to Earth? What if its crew had only its own wits to save them and not the flight controllers or the engineers back home? What if they had merely huddled passively in the lunar module as the air ran out? Having a plan B, relying on multiple options, actively managing in the face of crisis, these give investors the best hope of surviving in today’s financial markets.

Last week the stock market remained in the slow grind lower that has characterized it since it made new highs on March 1. While stock indexes were falling lower last week, gold and bonds were both rising. This, too, has been the case since the highs at the beginning of March.

However, as we pointed out last week, all three of these asset classes seem poised to break out. Gold did so last week amid heightened global tensions arising from the Syrian missile strikes, the MOAB bomb in Afghanistan, and the North Korean threats of renewed nuclear testing.

We saw some tentative steps in this regard as the S&P 500 broke slightly below its 50-day moving average—a negative, but only if confirmed by more downside movement today. Similarly, bond yields broke through supposed support and have resumed an unexpected downtrend.

While University of Michigan Consumer Confidence bounced above 98%, small-business confidence that had been at record heights continued to decline. Similarly, the Producer Price Index did not rise as expected last week but instead declined, running contrary to the Fed’s reflation narrative.

Through it all, our stock market strategies remained near fully invested, in some cases fully leveraged. This suggests that the month-and-a-half pause in the Trump rally may be coming to an end. Still, with gold and bonds rallying, global skittishness has not disappeared, and a flight to safety appears to be ongoing.

The most likely resolution in the intermediate term may come from impending earnings reports. The quarterly reporting season begins in earnest this week, and while there have been more earnings downgrades than upgrades during the preceding weeks, that has turned out to be a contrary indicator in past earnings periods. In contrast, too, has been the prognostication of some prominent gurus that long-awaited 9% to 10% average earnings growth may be evidenced this time around.

In addition, economic reports this week could play a part in determining the likely course of stock prices. The Index of Leading Indicators will report, and we will receive measures on the housing market. As to the latter, an encouraging recent report may indicate the housing market is finally rebounding from its long-term decline.

In these markets of mixed messages, are you as an investor equally able to deal with hearing “Houston, we’ve had a problem” as “Houston, we have touchdown”? Will you be relying on responsive, actively managed strategies or a passive holding pattern as your plan B when the next crisis occurs?

All the best,

Jerry

P.S. Hear the Apollo 13 astronauts Swigert and Lovell report on their problem on April 14, 1970: https://commons.wikimedia.org/w/index.php?title=File%3AApollo13-wehaveaproblem.ogg

What coolness under pressure!



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To our In My Opinion readers:
Everything in the newsletter pertains to strategies available on our Strategic Solutions platform at Trust Company of America. The same strategies are implemented on many other products: mutual funds, variable annuity, variable life and retirement platforms. Therefore, we expect the strategic discussion may be of interest to you. Note, however, that since these products have their own subaccount and fund universes and different internal expenses, the results and trading of the same strategy on other platforms may differ substantially from those described herein.

In My Opinion: Managed Retirement Plan Participants:
Most of you are managed using Lifetime Evolution and our sub-advised funds, so those topics will be most applicable to your account. But, more and more of you are in plans using Market Leaders. If so, that newsletter section may interest you