It happened again this weekend. Another dad came up to me during our sons’ soccer game and confessed. After some small talk, he lowered his voice and got to his main point. He had recently sold all of his stock market holdings. He explained that he was concerned about the U.S. getting into a conflict with North Korea and he didn’t want anything to do with the stock market when that time comes.

He wasn’t looking for advice. He just seemed to need someone to talk to. Knowing that I do something related to the stock market, he chose me.

The last time this happened was about a month before last fall’s presidential election. Part way through the first half of a soccer game, another dad told me he was planning to exit the stock market. He thought Trump had a chance to win and that would certainly send stocks south.

I saw him again a couple months after the election and listened to his regrets.

The most important part of investing

The principles of wise investing have long seemed counterintuitive to me. However, I used to think the most important of those counterintuitive principles was that getting your asset allocation right — the optimal stock/bond mix based on your age and risk tolerance — is more important to your success than the specific investments you choose.

I’d still include that as one of the most important principles, but now my vote for number one is that following a trustworthy investment process — one that relies on objective rules rather than subjective analysis or emotion — is more important to your success than the specific investments you choose.    

As Nick Murray writes in his book, “Simple Wealth, Inevitable Wealth,” “Wealth isn’t primarily determined by investment performance, but by investor behavior.”

And the primary driver of bad investor behavior is fear.

“No one is asking you not to feel the fear,” Murray said, “because there are very few of us who ever actually become immune to the emotion. You have to be who you are, and you have to feel what you feel. You simply have to refuse to act on the feeling.”

Of course, that is much easier said than done, which is why it’s so important to follow a sound rules-based investment process you understand and are committed to.

No free lunch

Investing is inherently unpredictable; it comes with no guarantees, which is why even sound rules-based strategies won’t make you money every month or even every year.

When we introduced Dynamic Asset Allocation, we described it as well suited for risk-averse investors. And it is.

In 2008, when the Wilshire 5000 fell -37.2%, our research shows DAA would have actually made 1.3%. However, because DAA, like Fund Upgrading and Sector Rotation, is a trend-following strategy, it would have racked up some losing months before aligning itself with the market’s downward trend and moving investors to safer ground.

The unpredictability of the market can even lead to entire years without an established trend, which can lead to losses and investor frustration.

Living in the tension

To be an investor means willingly signing up for a bumpy ride, accepting with eyes wide open that there will be some pain along the way. As Ben Carlson wrote on his A Wealth of Common Sense blog recently, each phase of the investment cycle brings its own set of challenges.

Holding during a bull market is difficult because you’re always worried about when the music is going to stop. And holding during a bear market is always difficult because you never know how bad things can get.

So the question becomes: How do you ensure you’re able to hold during a bull market but survive during the inevitable bear market?

Personally, I wouldn’t be able to handle either situation without a rules-based process in place to guide my actions. Trying to make investment decisions in real time during a rising or falling market without a set of guidelines in place is just asking for trouble. Emotion is the enemy of every portfolio and it rarely allows an investor to make rational decisions in the moment.

Most investors wouldn’t be able to handle either situation on their own.

Are you following the right process?

Investors never have to look too far to find a reason for concern. But dramatic portfolio adjustments, such as completely exiting the market because of the latest worrisome headline, usually prove costly. Just ask those who sold because of their fears over Brexit, a Trump presidency, or the recent elections in France.

Still, while we would never advocate completely getting out of the market, it’s healthy to reevaluate your overall process from time to time. The stock market moves in cycles, and after a long positive run, it’s appropriate to consider whether your current strategy still makes sense.

If you are following an aggressive process, such as a mix of Fund Upgrading and Sector Rotation, are you willing to accept the losses that a bear market would surely bring, trusting that the pain is likely to be relatively short-lived because you have a long investment time frame? Or would DAA suit you better, knowing that you’re unlikely to benefit as much from a continued bull market but that you would be better protected from a bear? (Yes, that's something of a trick question, as SMI typically advocates having both types of strategies — aggressive and conservative — within your portfolio mix.)

The key is to decide in advance. Doing so will help you sleep better. And if your kids or grandkids are involved in sports, it’ll help you enjoy their next game without worrying about your investments.