Siri®, is my route clear?
From our earlier articles, you know that tactical asset allocation involves having a well thought out system which allows you to change your mix of stocks bonds cash, etc. based on current market conditions. One of our data partners recently published an article which draws an interesting parallel between tactical asset allocation and taking a road trip. We think the analogy is amazingly close!
Here is an excerpt from their article:
We’ve all been on a road trip that starts out smooth sailing. Maybe it’s a clear, sunny day. There’s no traffic, the gas tank is full, and you’re well-rested; so you flip cruise control on and you’re on your way. Then, up ahead you begin to see more and more break lights illuminate as traffic slows and the road becomes more congested. At this point, what do you do? Leave your foot on the gas, and brace for impact? Of course not! You adjust to avoid catastrophe and reevaluate. If you cannot clearly identify the cause of the traffic ahead, how far it will last, or how long you will be delayed, you might even begin to search for alternate routes. Perhaps the alternate route is on a slower speed road with traffic lights along the way. Perhaps it adds an extra 30 minutes to your original travel time. At that point, you have a decision to make. Will you do nothing, and hope the traffic clears without too long of a delay; or will you adapt, and take a clearer route knowing it might take a little longer than your original plan? Each driver may have a slightly different answer here based on certain variables. For instance, how much gas do you have? When did you last eat? How many times will you have to hear, “are we there yet?” Some drivers may choose to change their path immediately, some may be okay just waiting it out, and others may take the opportunity to pull off at an exit, stretch their legs, and grab a bite to eat.
This example is analogous to the type of market we are in now. We aren’t at a complete standstill, but we also can’t see up ahead to know if the worst is over or if there’s miles of traffic to come. All we can do is take the information we have at hand and make the best decision possible.
We all encounter “traffic jams” at some point. How do we deal with them? Do we find an alternate route or do we sit and wait it out? In our investor analogy there is no question of what to do with a static allocation approach. You wait and sit in traffic, no matter what. Just sit.
However, as is the case in the market, there is typically a point at which most drivers get fed up with waiting. When they have reached this point, they can’t take it anymore and in many cases a rash, emotional decision is made. In an effort to deal with the traffic jam, they zig and zag or change their route, only to look back and see the original route is now clear. They made the mistake of either waiting too long to make a decision or they made a uniformed decision. They didn’t have enough data or a calculated plan before they encountered the traffic. Allowing “road rage”, or an emotional reaction to influence your decisions does not often end well. Most people only have to make this mistake a few times before they start to believe doing nothing is the only way – and they sit.
However, with some technology, a little planning and the right data, making a well thought out, non-emotional decision is possible. In traffic, iPhone users might say: “Hey Siri® – Is there a faster way to my destination?”
Though there is no magic “Siri®” for executing a tactical allocation strategy for your investments, the traffic analogy can be applied to how we handle the market’s volatility. The cars are equities; the buses are bonds and the car carriers can be mutual funds. If you have a plan in place to follow when things become uncertain, you will be better equipped to handle it than the person to the left that decides to blindly buy and hold and the person on the right that reacts based on emotion. We all want to be the motorist…or investor…that makes good time…or money…and arrives safely at our destination.