In a year that has surprised to the upside in terms of overall stock market performance, it can sometimes be disheartening to see that a portfolio’s safety net, it’s cash and short term, high quality bonds, continue to eke along without much in the way of return. How quickly we can forget the safety they can provide in tougher times was well covered by Jeannette in her blog on Market Amnesia just last month. Many investors have been burned this year by taking their fixed income investments just a little further out in duration, or just a little further down the quality scale only to find negative returns the likes of which you’d typically find in stocks in a bad market.
But that doesn’t change how we feel. If only we could’ve known. If only we could have just loaded all-into the stock market just when things were turning. If only we could know when the time was right to get out again. These feelings of wanting to be where the action is in any given moment doesn’t seem to fade in good markets or bad.
Recently, at one of my daughter’s soccer games, it dawned on me that this feeling or drive is nothing more than hard wired human nature. In the girls’ first few years in the sport, their natural instinct was to all run right to the ball and cluster on top of one another no matter where they were supposed to be on the field. The girls knew the game was about getting the ball in the goal, so where better to be than where the ball was at all times.
As the team has progressed, they’ve started to realize the importance of playing their position. They’ve learned that it’s when some of them stay back on defense, some stay on offense and those around the ball handler put themselves in a position where they can be where the ball needs to be next rather than standing right on top of her that they’ve really started playing as a team and have had some real success.
We inherently know when we watch athletes stay back on defense while their teammates have the ball upfield that they’re not doing anything wrong. In fact, they’re an important part of the overall game plan and are there to protect the goal when, inevitably, the other team grabs possession and comes back down field. The same is true in our portfolio. While high quality, short term cash and bond instruments may seem like they’re not doing much for us at the moment, we know they play an important position on our team when the next bear market comes along. By pulling back and understanding each asset class’ importance in the overall game plan, we can better understand how the whole team plays together to balance long term growth with short term sanity.
In soccer or the market, putting all of your players on offense or defense may bring an initial surge of success, but you’ll never win the game.