What Do “THEY” Really Know?

Are we on bubble watch or is this just more hype and talk from the media and analyst? The bond market has been one of the primary targets this year, but nothing has transpired to date. The great bond rotation as it was coined has not played out. There is every reason it will over time, but the willingness to exchange safety for risk has been a slow process. The current target is US stocks and they are being talked about relative to the valuations in terms of  growth and earnings. I am not going to defend either side of this argument as I have been around the markets for more than thirty years, and one thing I know for certain, the market can be irrational a lot longer than I can be solvent betting against the trend. This is not a matter of if we are in a bubble in bonds or stocks, it is a matter of managing the risk of your money in terms of the current level the market has obtained. Better yet, can it move higher from the current levels without causing undue risk to your portfolio. It isn’t about what “THEY” think, it is about what you want and believe to be true.

The S&P 500 index is currently trading more than 12% above the 200 day moving average. If the index were to correct under normal circumstances 10%, we would still be trading above the moving average. Is that too much risk? That is a matter of perspective and your risk tolerance. Remember that “THEY” who make up the rules don’t know who you are, nor do they understand your objectives. Truth be know, THEY probably don’t care about your money or your financial well being. YOU, not THEY have to determine what your pressure points are and where you need to head for the exits. Remember this goes back to three key issues…. 1) Purpose. Why are you trading/investing in the markets as well as a specific investment? The why factor is the primary reason you are doing this. Example: you buy SPY, SPDR S&P 500 Index ETF with the objective/purpose of growing the asset by 10% over the next twelve months to provide you the income you need next year during retirement.  Or, you will use the growth of the money to purchase a new car, pay for college, etc. etc. The purpose drives how you manage the money. We are five months into the year and you are up 12%, what do you do? Protect the gain and remember the purpose you are investing. The focus is the purpose not what they have to say. 2) A defined strategy for investing to accomplish the purpose. Knowing the strategy helps keep in perspective what THEY have to say and how you will act relative to each asset in your portfolio. 3) A disciplined approach for managing the risk of your strategy. That would be to define the entry, stop and target of every positions in light of the strategy, in order to accomplish the purpose. Thus, Purpose, Strategy and Discipline drive your portfolio every day.

When you as an investor understand the why, the how becomes much easier to answer. More importantly when you are confronted with the issue of a bubble party in stocks or bonds, you know what to do and how to address your portfolio! Regardless of what THEY say.

In this current market environment revisit the purpose of your portfolio, but more importantly each individual position within your portfolio. Address the risk of each position in light of today, not when you bought it. Ask yourself if you were putting money into the asset today would you buy it? If the answer is no, aggressively manage the risk of the asset should there be a reversal in price. If the answer is yes, manage the position less aggressive and give it room for market volatility in light of the current market environment. Money management is a process and a discipline we customize to our personality, goals, risk and overall objectives. Don’t allow “THEY” to undermine your process for achieving your end objective.