Rathbun: On the sidelines, not out of the gameWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
Those of you who read my columns consistently or listen to my radio show know that I feel the market is being held up by fumes and we need to be very cautious. Due to being extra cautious, I sometimes have quite a bit of money in cash. Currently, we have between 33 and 58 percent in cash in most of our accounts due to this market uncertainty.
I often find myself in the conversation that the cash account doesn’t earn any interest to speak of and shouldn’t we get that where it could earn more. My answer is always the same: Just because we are on the sideline doesn’t mean we are out of the game.
Using a football analogy is new for me but let me explain my reasoning. If you are an NFL team you have an offense and a defense. Both cannot be on the field at the same time. When you are playing defense your offense is on the sidelines doing virtually nothing. Does this mean that your offense is not worth its money when it is not out on the field? Of course not! Your offense is there waiting to go in when needed and it will perform at that time.
If your defense has done its job, you will have better field position for the offense and a much better chance of scoring.
This strategy will protect your end zone from the other team and ultimately win the game.
Let’s leave the analogy for now and see where we are in real life. By keeping our cash on the sidelines instead of in the market 100 percent of the time we are protecting our capital from decline. It may earn nothing but it will not lose anything either. Cash sitting on the sidelines will gain if the market goes down. If you don’t lose it you gain it. Better field position is your cash getting back into the market after it has declined.
This is the opposite of what is commonly called the “buy and hold” strategy. Buy and hold is the equivalent of having your offense on the field the entire game. Sure they get pushed clear back to the goal line by the other team but, hey, they can fight back the way they always do. This idea does not work in football and it doesn’t work in investing either.
When the market is going against you, as with the opposing team, you want your offense on the sideline and your defense on the field. You want to minimize the loss of yardage and money. In 2008, when the market went down 40 percent, where would you have rather been, on the sidelines or riding the ride down and not recovering until 2012?
This is not market timing. This is playing defense or offense as indicated by the market trend.
Offensive strategies include carefully using options, e.g., calls and puts, as well as stop limits and limit orders. Additionally, equity collars, private options and several combinations of option contracts will allow you to be on defense or offense when needed.
Convincing people to invest in something and hold on to that investment, regardless of what the market does, is the equivalent of hoping for a neutral outcome in the football game.
There is a lot of research that says that a buy and hold strategy consistently outperforms market timing, and I agree, but playing defense when appropriate or offense when appropriate is neither buy and hold or market timing. Cornell University recently did a study looking at the past 100 years that validates the strategy of defense/offense hedging and proving it greatly outperforms both previous schools of thought.
Give it some thought and your own study, then decide.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard every day on 1370 WSPD at 4:06 p.m. on “After the Bell with Brian Wilson and the Afternoon Drive” and every Wednesday and Thursday evening at 6 throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at email@example.com.