One of the problems with communicating is that words mean different things to different people. Some people say they are being defensive by selling all stocks and holding cash, or moving all they have into gold, or moving all they have into treasuries. It’s a wholesale, all or nothing, big bet on what the economy is going to do and what they expect the markets to do. It’s a short-term knee jerk reaction to the long-term expectations they have for this moment. But moment by moment, long-term expectations change. We get a glimmer of hope and some asset class surges. A poor report and people flee to these “safe havens”.
The media is responsible for this phenomenon, retarding investors’ ability to keep a long-term perspective and muddying the waters with conflicting information. For example, if you were to watch an hour of financial television, the standard format is to have two brilliant investment professionals with diametrically opposed worldviews arguing over the latest financial data that came across the newswires. This dialogue is confusing and unactionable to the average viewer. Furthermore, every piece of information relayed to the viewer is BREAKING NEWS!!! But the reality is it’s just noise.
The media promotes a short-term, speculative, trading-mentality. The only people who make money this way are hedge funds and institutional traders. Individual investors have no chance for long-term success emulating their behavior. Timing the market is foolish. For younger investors saving each month in their 401ks this volatility is awesome. But Retirees have to be more defensive and that does not mean buying gold and burying cash in Folgers cans in the back yard.
When I hear “defensive”, the first thing I think about is asset allocation. It must be designed to accomplish your short, intermediate and long-term goals. Short-term goals are going to be met with the capital allocated to cash. Intermediate-term goals will be met with the capital allocated to bonds. Long-term goals will be funded by the capital allocated to stocks. Occasional rebalancing is the key to managing risk and keeping the proper amount of capital allocated to these asset classes to accomplish all of these goals with differing time horizons. At any given moment one asset classes will be tanking, one will be surging to record highs and the rest will be treading water or somewhere in the middle. So the best defense is a prudent asset allocation that accomplishes your near-term and long-term goals.