Voices of Reason, Reasons for Caution

Oct 1, 2018
Listen to Article:

Every week, as we put together the Money Roundup, we scan the headlines from over 100 investment-related publications and we read countless articles that catch our attention.

Reading so much about investing on such a regular basis has given us a pretty good feel for which voices to listen to and which ones to shrug off — which ones are aligned with SMI’s overarching investment philosophy and which ones amount to no more than noise.

Howard Marks, co-chairman of Oaktree Capital Management, an investment management firm, falls squarely in the voices of reason camp. So, we were not surprised to read the following conclusion to his most recent memo (PDF).

“…investors should favor strategies, managers and approaches that emphasize limiting losses in declines above ensuring full participation in gains. You simply can’t have it both ways. Just about everything in the investment world can be done either aggressively or defensively. In my view, market conditions make this a time for caution.”

That speaks directly to our Dynamic Asset Allocation (DAA) strategy. Marks’ advice — to favor strategies that emphasize “limiting losses in declines above ensuring full participation in gains” — perfectly describes what DAA is designed to do.

Marks isn’t making predictions, he’s simply encouraging investors to consider “where the market stands in its cycle.” It was just such thinking that caused Oaktree to develop “a highly defensive posture” in 2005-2006. His firm didn’t necessarily see the 2008 financial crisis coming, but it did see too many investors eagerly taking on too much risk. Today, he sees very similar conditions, with the market being driven by too much optimism and too little risk aversion.

He believes, “this is the kind of environment…in which investors should emphasize caution over aggression.”

Yale economist Robert Shiller, a 2013 recipient of the Nobel Prize, expressed similar concerns in a recent MarketWatch column, in which he decried “the public’s loss of healthy skepticism about corporate earnings” and warned that “a bear market could come without warning or apparent reason.”

What’s an investor to do? Another writer we follow and respect, John Mauldin, chairman of Mauldin Economics, has been pointing in his recent writings to a path we’ve been advocating for the last four years — diversifying among investment strategies. “The goal,” he wrote on September 21, “is to win by minimizing losses and having the flexibility to capitalize on market opportunities.”

That’s exactly what our 50/40/10 approach is designed to do.

Like the writers cited above, we are not predicting an impending bear market, but we do see reasons for caution. And we’re glad to offer several strategies that provide unemotional, rules-based approaches to deciding when to move out of harm’s way and how.

Written by

Matt Bell

Matt Bell

Matt Bell is Sound Mind Investing's Managing Editor. He is the author of five biblical money management books and the teacher or co-teacher on three video-based small group resources. His latest book, Trusted: Preparing Your Kids for a Lifetime of God-Honoring Money Management, was published by Focus on the Family in 2023. Matt has spoken at churches, universities, and conferences throughout the country and has been quoted in USA TODAY, U.S. News & World Report, and many other media outlets.

Revolutionize Your Investing Approach

Unlock Your Wealth-Building Potential with Sound Mind Investing

Don't leave your investments to chance. Let Sound Mind Investing guide you to financial success. Experience the power of our simple, rules-based strategies and see your wealth grow.

Unlock your wealth-building potential for as little as $0.32 a day.