The Higher Stocks Go, The More Important Risk Management Becomes
Summary
- With “new high” showing up in market reports on a frequent basis, it is prudent to nail down equity risk management plans.
- Economic and central bank signals are quite a bit different in the United States and Europe, making seat of the pants allocation decisions more difficult.
- Rising inflation in the United States could bring correction/bear market plans into play in the coming months.
Financial Markets Are Complex Organisms
Just as the human brain is an extremely complex organ, the financial markets have an almost infinite number of factors that ultimately determine the value of our investment portfolios. Therefore, it is unlikely that “figuring it out as we go along” will produce favorable investment outcomes. In the present day, there are numerous and somewhat conflicting signals. On the bullish end of the spectrum, growth in the United States appears to be picking up and the Fed has been extremely accommodative. However, the economic bears can point to low inflation in Europe (fear of deflation) and rising prices in the United States that may force the Fed’s hand.
Investors Need A Consistent Approach
While we are not brain surgeons, our guess is that surgery involves somewhat of a “flow chart” or “if, then” approach. For example, if bleeding needs to be contained, then there are specific steps to address the unfavorable situation. An investment risk management plan works in a similar manner by having specific and executable strategies that follow an “if the market does this, then we will do this” script. A recent bullish example surfaced on June 8 as observable evidence began to surface in equities favor. The evidence allowed for a prudent “bump up” to the growth side (SPY) of our portfolios.
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