In 1987, I had one of the greatest moments of my financial career.
Back during my Goldman Sachs days, I met one of the firm’s big-shot clients, John (as I’ll call him).
John had been on dialysis when a new drug changed his life. His story was so powerful and his passion so strong that I asked him the name of the drug. He said “E-P-O.” The tiny company that made it was called “Amgen.”
Many of you will recognize Amgen as the preeminent biotech company in the world today… a $128 billion behemoth that pioneered the use of bioengineering in the development of drugs. But back in 1987, its success was anything but assured.
Amgen was merely one of at least 20 other equally promising biotech startups.
It was a risky play. But everything I learned about it looked great: The science made sense… and I figured any drug that could save or alter a life like it had John’s was probably a good bet.
And it was. I easily made 20 times my money. Since then, I’ve had more success in my entrepreneurial career.
But not all of my investments have done well.
In my early entrepreneurial days, I got involved in a small restaurant group.
The manager of the venture was an ex-Marine JAG who wanted to get into business for himself. He was a trusted friend. The plan was simple: open a small franchise restaurant in Minnesota. This was the 1990s and we could choose from a whole range of franchises.
The manager narrowed it down to two choices and presented them to the group. We deferred to his judgement and let him pick which he thought would do better.
Our ownership in Cajun Joe’s flopped. It was a bad choice. And even though he was under no obligation to do so, the business manager went back to work as a corporate lawyer and eventually paid back all his investors in full.
Of course, I wasn’t relying on that. It was one investment I had made among many… and I only put up a small portion of my savings.
But had the manager taken the other option, a just-about-to-boom Subway sandwich shop, things would have been a lot different. Our little restaurant group would likely have been highly cash-flow-positive and expanded to multiple locations.
From my perspective, success or failure in this venture essentially came down to a coin flip. Not skill. No matter how much work you do, the role of chance can wash away years of planning.
The best-selling book The Millionaire Mind studied hundreds of millionaires and found they shared some common traits. They were frugal, lived simply, and were hard-working. So far, that’s good insight.
It also found that these millionaires had an urge toward taking risks. After all, you can’t make money without putting some on the line. The book claims, “There is a clear and very significant correlation between willingness to take financial risk and net worth.”
Sure, there is… when you study a sample of successful millionaires! What about all the risk takers who lost?
Nassim Nicholas Taleb took this analysis to task in his book Fooled by Randomness…
Clearly risk taking is necessary for large success – but it is also necessary for failure. Had the author done the same study on bankrupt citizens, he would certainly have found a predilection for risk taking.
Many investors and other wealth seekers take the view that they have to seek out one big bet and pile in… They figure if they search hard enough, they can find that sure-thing stock or strategy that will turn them from a wage earner to a wealth spender.
Everybody wants to be the bold investor who shorted the housing market or the dot-com boom at exactly the right time.
But for every investor who pulled those tricks off, there are hundreds who went bankrupt.
You Have a Far Better Option
Don’t time. Tilt.
That’s what individual investors miss in every market cycle and every boom and crash.
Many investors think of the stock market like a rocket that they ride higher and higher. A rocket, of course, goes up… until it doesn’t. They think if only they could release right as the rocket peaks, they could float into orbit – the world of the wealthy – and watch the rocket plummet back to Earth.
Sounds fun, but it’s wrong. The market doesn’t have one trajectory up… then down. So in order to time the market correctly, you have to not only get your sell decision right, you also have to decide when to get back in. And more often than not, the market will whipsaw back upward and force you to either buy back in at a higher price or sit on the sidelines, missing big gains.
It rarely works.
Fortunately, there’s a better way to play the market’s ups and downs. Don’t try to time them with an “all or nothing” decision, simply tilt your allocations. It’s that easy.
Don’t ever decide that it’s time to sell all your stocks… or to load every penny you have into them.
You have far more possibilities for how much risk you want to allocate between stocks, bonds, cash, and other investments.
For example, do you remember the January 2016 crash?
At the time, China’s stock market had dropped and anything with risk attached – like stocks and high-yield bonds – came tumbling down. One Wall Street analyst published a note that it was time to “sell everything.”
There’s a reason you don’t often see bold pronouncements like this from serious research shops… It’s terrible advice.
Not a single coherent investment strategy relies on selling all of your positions based on a prediction of a market crash. No successful hedge fund, portfolio manager, pension fund, or private wealth manager operates on such a nonsensical scheme.
At times, you may increase your allocation to cash and defensive plays. You may add some short positions.
How would you feel today if you sold everything in 2016 at the January bottom… and then watched the market rally nearly 50% higher?
Of course, I’m not making a case for permanent bullishness.
In fact, I’m doing the opposite.
Right now is the best time in the past 10 years to reduce your risk and move some of your capital to cash and cash-like investments.
We’ve been bullish since 2009. We’ve argued the economy was “grinding higher” and that income investors could earn good returns – even with low interest rates – thanks to positive fundamentals. We have not once called for a bear market that didn’t happen.
And we’re not calling for a bear market now. If you think we should, you’re missing the point.
Rather, a sensible reading of the market suggests that peeling off some of your equity allocation and moving it to cash and cash-like investments will serve you well.
There’s still a good chance the market can go higher.
But the upside left in stocks is waning, and the potential downside rising.
Last night, during an Urgent Market Briefing, I told attendees it’s time to make changes. This is going to be a critical year for investors. The decision folks make about what to do with their investments right now could be the most important since the housing crisis.
And for those who are retired or planning on retiring soon, this decision is going to be even more critical.
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig and the Health & Wealth Bulletin Research Team
January 24, 2019