Defensive Investing
“The best offense is a good defense”
In sports, a good offense is always exiting to watch, but, more often than not, it is a great defense that wins championships! So it is with investing.
I view investing as the financial championship game of your life. A game that you only get one chance at and one that you must win.
In order to prevail you need a solid offense to generate positive returns, but you also need a great defense to keep them.
I specialize in Defensive Investing™, a term I coined to describe my investment management philosophy and approach.
My investment philosophy is based on the fundamental belief that your long-term success and your ultimate financial security depends not only on how much you make during market advances, but more importantly, on how much you keep during market declines.
The goal of Defensive Investing™ is to provide an investment strategy that performs well in all market environments – up, down or sideways. The focus is on both growing and protecting your wealth, with special emphasis on capital preservation in difficult market environments.
The strategy seeks to limit losses and preserve capital during market declines and to capture gains when the market advances. This is accomplished by using money managers who employ an active approach to managing risk and returns, which gives them the flexibility to respond to changing market conditions.
I believe that this approach provides investors a distinct advantage in navigating the opportunities and uncertainties in today's financial markets.
Three Enduring Lessons
I’ve been advising clients on money management issues for over 30 years and have experienced many rewarding and challenging market environments. Over that time I’ve learned three important lessons:
- Losses count more than gains. Portfolio losses, on a percentage basis, have a much greater impact than do gains on long-term performance, so minimizing losses is critical.
- Historically, the stock market moves in long-term trends that typically last 10 to 20 years, producing long periods of high returns, followed by lengthy periods of low returns. It’s absolutely essential to your long-term financial security to understand the reality of these trends and know which market trend you’re in. Unfortunately, most investors and advisors are unaware of this or choose to ignore it.
- You have to match your investment strategy to the market environment in order to be successful.
I elaborate on each of these points in more detail. I invite you to read further by clicking on the link below to access this helpful perspective.
I believe that the more informed you are, the better and more confident financial decisions you can make.
Three Enduring Lessons
In Closing.
In closing, I’d like to end on a fun “note”. Pardon the pun. The philosophy of my active management approach reminds me of the wisdom in the lyrics from the Kenny Rogers’ song The Gambler. I have adopted it as a kind of a theme song representing my investment approach.
As you recall, on a warm summers evening two strangers met on a train bound for nowhere. The younger one was down on his luck and the older one was a gambler. For a taste of his whiskey, the gambler offered some advice. As he drank the last swallow and bummed a cigarette, the night got deathly quiet, his face lost all expression, and he said:
“If you’re going to play the game, boy, you‘ve got to learn to play it right.
You got to know when to hold 'em, know when to fold 'em,
know when to walk away, and know when to run.
You never count your money when you’re sittin’ at the table.
There’ll be enough time for countin’ when the dealin’s done.”
Now every gambler know that the secret to survivin’
is knowin’ what to throw away and knowing what to keep.
Cause every hand’s a winner and every hands a loser,
And the best that you can hope for is to die in your sleep.”
You can probably hear the beat of the music as you read the words. It’s a catchy tune.
What I take away from the lyrics is that first, if you want to win, you have to learn how to play to win and play the game right. Next is that you have to actively manage the investments in your portfolio, like you have to actively manage the cards in your hand. Rarely is the winning hand the first cards you were dealt. Buy-and-hold doesn’t work in card games, and it certainly doesn’t work with investing.
In a card game, as in the financial markets, the environment can change unexpectedly and dramatically during the game and you have to know how to adapt to give yourself a chance to win.
You have to evaluate each investment according to the risks, the opportunities, and the market environment you’re in. Stocks can make you money, and stocks can lose you money, and you need to understand why that happens. Part of the secret is knowing what and when to buy, and what and when to sell.
The other part is knowing when to “hold 'em”, and when to “fold 'em” when the risks are too high.
Sounds like a sensible investment strategy to me. How about you?
I welcome your comments and inquiries.
The opinions expressed in this commentary are mine alone and do not represent the views or opinions of LPL Financial.
Copyright © 2009 Jeffrey M. Stark, CFP®
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