Risk Assessment, Not Predictions

The Wall Street Journal had a write up about protecting portfolios against some sort of AI bubble popping. It listed out several ideas including healthcare stocks and gold. The article didn't have too much that was new but the comments were interesting. Always read the comments. 

Quite a few of the comments picked up on an element of trying to time things that usually aren't timeable. This is coincidental to a couple of different conversations I've had this week related to trying to predict things or time them. 

We've talked about this before of course but once you can change your mindset from trying to predict outcomes to isolating and then reducing exposure to risks, things become much simpler. Looking for signs of excess is a good place to isolate risks. If you spent 30 years working at Amalgamated Spats and have a lot of stock in the company, that is an excess if your shares represent some disproportionately large percentage of your portfolios. 

Derisking then becomes just that, reducing your vulnerability to an excess that you are exposed to. If 50% is in Amalgamated Spats and the stock craters for whatever reason, that would be a serious problem. It would also be an unnecessary problem. It's easy to understand that 50% in one thing is a problem without having to predict anything. 

Tech plus communications adds up to about 45% of the S&P 500. History has not been kind to sectors that have previously gotten past 30% of the index (energy in the early 80's and tech in 2000). That is an obvious risk factor. The way we phrase that here is to have no idea whether there will ever be a consequence from that risk factor but it is there nonetheless.  

There were obvious signs of excess in the financial crisis in terms of banks and real estate, ten year treasury yields at 1%  were another one, both of which we blogged about in real time. 

Are you taking withdrawals from your account to live on? If you are, having 99% in equities is a different form of excess. If there is a whoosh down that doesn't snap back like the one in April, this is a scenario that will require selling low or going without income. That seems very avoidable without having to make any sort of prediction. 

I can't say it any more plainly but instead of trying to predict anything, the idea here is to avoid obvious signs of risk or excess. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.