Money Talks

By Thomas H. Yorke
Managing Director, Oceanic Capital Management LLC

The Benefits of “Playing Defense”

In ice hockey, each team has five skaters and only two defenders, but often it’s time to play more defensively, the coach changes things up, and the team plays in the neutral zone of center ice. The same is true for investing; the trick is the timing.
Recently, we witnessed a good example of why playing defense can be so important. In hours, Gaza escalated into a ground war, and a commercial airliner was shot down over Eastern Europe. We talked about the importance of factoring timing into your investment planning; i.e., are you putting money away for retirement or do you need a chunk of cash for some near-term obligation? The longer your money can stay invested, the more risk you can take, and greater the potential returns. So timing is critically important.

Market timing is different than personal timing. Market timing is a strategy of making investment decisions based on what you think will happen in the market in the short term. Think of market professionals making investment “bets” on a hunch; fine for someone spending all his day reading the financial tea leaves, but for you and I, it is a disaster looking for a place to happen.

Typical investors do the exact opposite of what they should. They buy high and sell low, largely due to inexperience and human nature. We are more comfortable investing with the crowd; consensus views make our decisions easier. We wait until we are certain a market will continue going up, then buy. Much of the price movement has already occurred by that time. Conversely, when the market price heads down, we postpone any decision to sell. The result: “real” losses, fear, and a renewed conviction of extreme caution. Many investors went for the exits in 2008 and 2009, only to miss one of the best bull markets later that year.

Facing some short or medium term obligations? If you need your money within 12 months, check out of the market and move cash to the sidelines. Look for a well-known money market fund or just buy treasury bills; the return is close to zero, but your objective is safety and liquidity.

If your cash needs are in the 12-24 month area, we would advise moving a significant percentage of these obligations into a short term treasury fund or ETF; it will earn a bit more than zero, but not much. Call this your “sleep at night” trade. Sure, you miss any potential uptrend, but sleep better knowing a sudden rise in U.S. interest rates or a Russian invasion of the Ukraine won’t affect you.

It may be a good time to invest a bit more defensively. More defense could simply be moving a higher percentage of your investments into cash, money market funds, or short terms treasuries. You should also start looking at your mix of investments. How much of your account is invested individual stocks and bonds versus mutual funds and ETFs? Does any noticeable concentration exist? Check your ETF and mutual funds holdings versus your stocks. Do you have similar holdings? Consider your exposure to any specific industry. Any chance you also work in this field? If so, you now have additional risk. Sectors like consumer staples are often more defensive. Ultra large companies can be less volatile; they have proven track records, rock-solid market positions, and a history of paying and growing dividends. Making a few moves like these ahead of time can save dollars and stress.