Better to Dance with the Devil You Know Rather than the Devil You Don’t

Better to Dance with the Devil You Know Rather than the Devil You Don’t

There is a saying that it is better to dance with the devil you know rather than the devil you don’t.  

Nothing could be more true about that statement when applied to portfolio management today.  I have a feeling that many investors are discovering that they were dancing with a devil they did not know.

Or knew….but chose to ignore.  

I hold a strong conviction that risk-management should be part of EVERY investment strategy.  

The magic of compound growth can only occur when losses are kept small.

This is not my opinion but rather the irrefutable laws of mathematics.  Since every compound, period begins with the previous period’s ending balance, losses matter….a lot.  

Consider today, with the DJIA down about 32% from the recent market highs, it now requires a near 50% return to just getting back even.

In recent years, passive investors have scoffed at doing anything but  “buy the market”. 

Every decline has been met with “buy the dip”.

Investors lost patience with sound strategies that may have protected them in times like now…all because somewhere they were told that they must always perform as well as the market.

Be careful what you ask for.  ‘You want the market’s return on the upside?  Great. Here’s the downside that goes along with it.  

History books are filled with examples illustrating that there can be periods of time when the market has dealt investors with serious losses.  The fact that it has occurred in the past means it can happen again. And who is to say that the worst period is not behind us…but in front of us.

We do not know for the future is unknown. 

So for that reason, I chose the devil I know.  I choose to always engage with risk management because I would rather incur only a small loss than to be potentially exposed to large and catastrophic losses that I cannot control…and cannot recover from.

I would rather always put a predictable process before an unpredictable future.   

I will happily accept the fact that during strong bull markets lead by narrow leadership, my systematic diversified portfolio underperforms.  That is the devil I know.  

Better yet, I have my bear market protection in place automatically without having to think about it.

The reward is that my Balanced model is up 3.5% YTD.  Focus Four is up 1.0% Cornerstone is -2.3% and Keystone is -5.53%.  For those models with small losses, I can easily recover.

If a client is invested in them, it’s not a difficult conversation.

If you are an investor who has ignored risk…who has gambled on the future, you are now being given an expensive lesson.   

You are dancing with the devil you don’t know.