I moved to Florida to work alongside Steve Sjuggerud about two and a half years ago.
His island home (and the nearby office on the beach) seemed like paradise. Then, I experienced my first hurricane season…
The storm hit the area where I live. My home, on relatively high ground, was fine. Many others near me weren’t.
I’d never seen the power of weather quite like that. I grew up in Colorado. And the mountains of snow we got when I was a kid were nothing like the pounding force of a hurricane.
But the thing that stood out most to me wasn’t the force of the storm. It wasn’t the aftermath, either. Those were mostly in line with my expectations…
What stood out most to me was how people expressed their fear of risk… how they prepped for the storm.
Right now, a lot of investors are worried about the markets. They’re prepping for another kind of storm. But as I’ll show you today, these folks are going about it all wrong.
Let me explain…
If you’ve never lived in a hurricane-prone area, let me tell ya – it changes the way you think about risk. Every person has his or her own way of dealing with the threat. I hadn’t expected such a huge range of behavior.
But one group of people stood out the most. And it wasn’t the last-minute shoppers that picked the store shelves dry.
No, there was one preparation strategy that you couldn’t help but notice. That’s because it came at an obviously high cost…
I’m talking about the “early boarder-uppers.”
They were the group of people, mostly affluent, that chose to board up their homes ridiculously early. Some of them did it as soon as it looked like there was even a chance the storm would head our way.
Then, they got out of Dodge.
Now, I understand that everyone’s life situation is different. For some of these folks, it probably was the best decision for them and their families. But many were falling into a classic human failing. It’s one that investors fall prey to all the time.
They spent a lot of money trying to limit all possible risk… as early as possible.
The reality is, they should have had a little patience and saw how things progressed before making a rash decision. All it would have taken was a better risk-management strategy.
By waiting a few days, and getting more and better info, they could have made a better-informed decision about whether to leave. Maybe they could have avoided the hassle and cost of evacuating altogether.
The point is that trying to eliminate all risk can be a risk in itself… And it certainly has a cost.
We saw that exact same idea play out in the market this year…
UBS is the world’s largest wealth manager. And in May, it released a stunning survey. The results showed that its high-net-worth clients had fled to cash. The primary reason was a fear of recession.
At the time of the survey, those wealthy clients were holding 32% of their portfolios in cash.
Just think about that. That’s a third of their investments, not making money. And that’s a third of their investments that completely missed the turnaround in global stocks.
Simply put, they boarded up too early.
Now, don’t get me wrong. The storm clouds of recession are on the horizon. They’re even closer now than they were in May.
That doesn’t mean it’s time to board up yet!
There could easily be months, or even a year or more, of gains ahead of us. And boarding up now would mean that you miss the final stages of the Melt Up.
That’s the “last hurrah” in stocks before the end of a bull market. And we’re seeing what looks like the beginnings of it right now.
You have to remember… some risk-management strategies cost more than they’re worth. And I’m sure that many of those wealthy UBS clients found that out as the year progressed.
They were caught boarding up too early. And the price they paid was too high.
Don’t fall into that trap yourself.
Good investing,
Vic Lederman
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Source: Daily Wealth