Blind Spots
Two weeks ago, while driving to Vermont, the traffic was heavy. I was traveling a different route than normal due to the effects of the tornadoes and Hurricane Ida. At one point on the journey, after checking my rearview and side mirrors and glancing left, I began to move over to the passing lane. A horn blared. I had not seen the car on my left and almost caused a high speed accident. It was a few miles before my heart rate came back down, but it reminded me of the importance of being aware of the blind spot while driving.
When I ride my bicycle, I have to be aware of blind spots too. Yes, you can glance over your right shoulder or your left shoulder, or both, yet still not get a full view of what is behind you. I never saw the deer that hit me in the rear wheel three months ago. During the Vuelta this year (the Spanish equivalent of the Tour de France), there was a massive crash that knocked out several leading contenders due to a rear wheel getting clipped by another rider. When you are out in front, you never see what sneaks up in your blind spot.
I am worried that we don’t recognize that blind spots exist when it comes to investing as well. All of the major market corrections, turndowns, and sharp declines that have occurred during my career came out of the blue. They were a surprise, both in timing and magnitude, and caused damage to portfolios. The Crash of ’87, the Long Term Capital Management sell off (1998), the Dot-Com bubble (2000-2002), the Great Recession (2007-2009), the Flash Crash (5/6/2010), and the most recent Covid related sell-off (which ended 3/24/2020) surprised the overwhelming majority of Wall Street prognosticators and investors. We never saw it coming.
What does tell us about investment planning and management? How does this inform our decision-making? Is it “safe” to be an investor? These are all legitimate questions. There are many more questions that we could ask.
Investing involves risk. We have tons of information, but nobody has a lock on all the good information. In fact, I would argue that we have too much information and it is too easily disseminated, making it hard to distill good information from the noise. You need to be aware of this shortcoming with respect to information, and understand that investment management sometimes involves decisions that are not simply cut and dry. I call this “living in the grey.”
Acknowledging our shortcomings, one must build portfolios that are flexible. Asset allocation helps us, as does diversification. And liquidity needs to be considered at all times. Being able to move easily and thoughtfully between stocks, bonds, and cash is an advantage. Keep in mind, in bad times, liquidity allows us to have the resources to pay our bills, avoiding the terrible feeling of having to sell assets when prices are deeply depressed. And liquidity enables us to capture opportunities when prices are down. This last task is easier said than done.
Recognize that blind spot, fellow investors.
Finally, whether investing is ever “safe” depends on your perspective. If your investment time horizon is short, safe investments will be limited and returns will be low. If your time horizon is longer, you have much greater flexibility to absorb fluctuations and let the power of compounding help you build wealth. Literally, as the Rolling Stones would sing, “time is on your side.” In my experience, when markets tumble we sometimes forget about our time horizons and let the blind spot of “current account value” drive our decision making.
It has been said that good financial advisors earn their clients’ loyalty by helping them through bad markets, limiting portfolio damage, and keeping clients focused on their specific investment goals and objectives. I believe this is true, and would add that knowing your particular “blind spots” leads to even better outcomes.
As Sgt. Phillip Esterhaus would say: “Let’s be careful out there.”
September 17, 2021
Raymond James & Associates, Inc. member New York Stock Exchange/SIPC.
Any opinions are those of Ralph McDevitt and not necessarily those of Raymond James.
This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, sell or hold a specific security. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss
