Earlier this week my wife and I were discussing the stock market events that were taking place in front of us; markets gripped by political intrigue, both domestic and overseas, violent swings in volatility, slowing economic growth, and lots of uncertainty. I then started telling her about what my plan was (I was actually getting excited) and she chimed in “it’s like the Hitchhiker’s Guide to the Galaxy !” I stared at her a bit taken aback while I searched my memory banks for any relevant investment wisdom from that hilarious tome. And then it hit me……
Right there, printed in big bold large cap letters in front of the most important book in the universe are the words, DON’T PANIC Here’s a little refresher from Wikipedia:
In the series, DON’T PANIC (always upper-case) is a phrase written on the cover of The Hitchhiker’s Guide to the Galaxy .  The novel explains that this was partly because the device “looked insanely complicated” to operate, and partly to keep intergalactic travelers from panicking.  It is said that despite its many glaring (and occasionally fatal) inaccuracies, the Hitchhiker’s Guide to the Galaxy itself has outsold the Encyclopedia Galactica because it is slightly cheaper, and because it has the words “DON’T PANIC” in large, friendly letters on the cover. 
If you haven’t had the pleasure of reading the whole series of books by Douglass Adams I highly recommend them. They are even available on audio CDs of the classic BBC radio series.
And that is the most important investment advice I could give anyone during these kind of turbulent markets. Emotional decisions during turbulent markets lead to poor investment decisions. This is one of the main reasons investors fail to even match the performance of mutual funds which themselves fail to match the market’s performance. Most investors tend to buy high and sell low. Rare is the investor who can truly practice buy and hold and stick to an asset allocation plan through turbulent markets. And that is the rub. We are all human beings subject to our emotional biases and shortcomings. So what do you do if you’re not the emotional rock of Gibraltar, rational automaton, that is required in order not to panic?
There are many things but the most important one in my book is to have a plan for turbulent times like these. In particular is to have a plan in place, preferably on paper somewhere, before times like this happen. I’ll give you a few examples from my plan.
- First and most important my portfolio and investment model is specifically built for times like these. I built my model around a macro outlook that called for the S&P500 being at the same level 10 years from now as it was in 2010. As I’ve said many times here downside protection, capital preservation, trumps everything, in particular for retirees who depend on portfolio withdrawals or income from the portfolio. I care more about avoiding negative performance than outperforming the market on the upside.
- This is related to my first point but for times like these is one of the biggest reasons I built my portfolio from quality dividend paying stocks. As long as the dividend checks keep coming, and growing, I really don’t have anything to worry about from Mr market saying that my stocks are worth less today than yesterday. Of course, one needs to remain vigilant that those dividends will remain stable. I’m always on the look out for signs of weakness that may affect a company’s dividends and for chances to upgrade to a higher quality holding. For example. I’m considering swapping my ETP holding for KMR and recently sold out of NGG because it had reached my estimate of fair value and their was higher dividends to be made elsewhere.
- Hold a large cash position. Cash provides options, opportunities, diversification . Very very rarely would I go to less than 20% cash. Currently I’m at 60% cash. Along with this cash position I have a buy list that I always keep updated. It has my top 10 buys and the price ranges I would buy at. I also use my cash position to trade. During times like these I will reduce my trading size and frequency significantly until conditions improve. For example, currently I’m 100% cash in my trading portfolio and have done only 2 trades in the last month, both in long term bonds.
- Stay flexible. This is a core part of my investment model but deserves mentioning again. My plan is just a plan. The future is a big unknown. I can do everything I can to be prepared but ultimately the biggest asset I can think of in light of an unknown future is flexibility. If my plan does not work out I will adapt, change, and learn. I’ve found that this is a great general life strategy in general.
I hope that helps a bit. Yes, in short, DON’T PANIC , but you need tools to help you do that. A plan is the best thing you can do to help you navigate these times. As I sit here writing on Sunday night, preparing for a drive from Hyrum, Utah to Glenns Ferry, Idaho tomorrow the S&P500 futures are down about 2.5%. No problem. I’m not in a panic, I have my plan, and actually I’m excited at the potential upcoming opportunities to enhance my future returns.