When in Doubt, Take the Safe Route

Apr 28, 2020
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Do you become anxious when circumstances compel you to make important investing decisions? You’re not alone. If our reader comments are any indication, there’s a high degree of financial fretting going on out there!

There’s a recurring theme in the comments we’re hearing right now:

  1. There’s so much at stake. I’d hate to make the wrong decision.

  2. I’m not sure I know what I’m doing. I’d hate to make the wrong decision.

  3. Can I fully trust SMI’s strategies? I’d hate to make the wrong decision.

What is the “wrong” decision, anyway? If you’re thinking it’s like saying 2+2=5, you have a misunderstanding about investing. Investing decisions can’t be made with mathematical certainty. Perhaps it’s because financial markets deal with numbers (e.g., “a 50-point advance,” “a 6% return”) that we get the idea that investing is somehow like scientific research: add up all the facts and you arrive at the correct solution.

Investing isn’t that straightforward. Indeed, investing is as much art as it is science. There are few fail-safe rules, and decision-making can be surprisingly subjective. This doesn’t mean the economy and investment markets are entirely random. It only means that we’re dealing with probabilities, not certainties and predictable events. (It’s somewhat similar to a familiar example from everyday life — scientists can predict with great accuracy when the next eclipse of the sun will occur decades into the future, but they can’t tell you for certain if the sun will be eclipsed by heavy clouds next Sunday and ruin your picnic!)

“The race is not to the swift”

All of this is actually good news for you. It means anybody can play. It’s like learning to drive a car. After a couple of lessons, you’re not an automotive expert, but you’ve learned enough to travel around town. After all, you’re not trying to qualify for the Indy 500 — you just want to reach your destination safely. In the same way, if you’ve been reading and applying the concepts in the SMI newsletter for six months or more, you’re fairly well equipped to make whatever decisions you face.

Imagine you’re in a contest where you are to travel from coast-to-coast before the Interstate Highway System was built. You can choose any route (but they’re almost all two-lane roads), travel at any speed, and take as much time as you like. There are no bonus points for arriving first — the only goal is to arrive safely. Everyone who does that “wins.”

As you drive along, you must make decisions constantly. Should you take the route to the left or the right? Is there construction or traffic up ahead? Even if Google Maps were available to you, can you trust it to be accurate? And besides, what if you prefer the most scenic route, not the most efficient?

There are no “scientific” answers to these questions. Each decision requires powers of observation, the ability to learn from your experiences, and a little common sense. You rarely come to a point where the choice is obvious. It would always be helpful to have “just a little more” information — what you know never seems to be enough. But the challenge of the trip is in having to make choices without having all the information. No one ever has all the relevant information. Can you survive on what you do know?

“Steady plodding brings prosperity”

Investing is much like that. When, for example, we point out that conditions may be building toward an economic downturn, as SMI executive editor Mark Biller did last fall, that is not a prediction that it’s going to happen right away. It is merely an observation about a probability. And no one can foresee “black swan” events such as the COVID-19 pandemic.

So, when Upgrading 2.0’s defensive protocols began to trigger at the end of March, or when Dynamic Asset Allocation (DAA) began moving investors out of harm’s way at the beginning of February, we weren’t suggesting that we’ve unlocked the secret of the market and that those protocols would lead us to the investing promised land. Rather, these strategies picked up on objective indicators which suggested that the market may have further challenges ahead. Paying attention to such indicators gives us a greater likelihood of protecting our portfolios from more damage when the market trends downward.

When a downward trend comes with high volatility, strong counter-trend rallies may leave some readers wishing they hadn’t taken so much money out of the market. On scary down days, the same readers may complain that the defensive protocols weren’t defensive enough or didn’t become defensive soon enough! There’s no perfect answer.

We think Upgrading 2.0 and DAA will work well for most SMI members, but no doubt some will wish to chart a different course. That’s fine. We provide the information, but ultimately you’re responsible for making your own decisions.

As we wrote when Upgrading 2.0 was introduced, the strategy’s new defensive protocols purposely avoid all-or-nothing portfolio changes. Why? Because we not only can’t know the future with certainty, we recognize that we can’t. It’s unknowable. It’s because we can’t know the future that we diversify and make incremental changes.

Still, safeguarding your portfolio is important. Which brings us to one of the few rules investing does have: Protecting your capital in a bear market is at least as important — and arguably more important — than capturing all of the gains in a bull market. It’s simple math. If you lose 50% in a downturn, it’ll take more than a 50% gain to get back to even; it’ll take a 100% gain. So minimizing losses in a bear market is critical.

That’s why heeding objective — yet admittedly imperfect — signals that tell you when to take your foot off the gas is crucial to “arriving safely.” As Formula One racing champion Niki Lauda once said, “The secret is to win going as slowly as possible.”

Written by

Austin Pryor

Austin Pryor

Austin Pryor has 40 years of experience advising investors and is the founder of the Sound Mind Investing newsletter and website. He's the author of The Sound Mind Investing Handbook which enjoys the endorsements of respected Christian teachers with more than 100,000 copies sold. Austin lives in Louisville, Kentucky, with his wife Susie. They have three grown sons and many grandchildren.

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.

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