Avoid all-out attack when investing
Updated: Mar 1, 2022
Attacking teams win matches but defensive teams win championships. You hear it all the time in professional sports, and the same is true of investing.
It will feel boring, but it is important to build up your investments starting with defense in mind. Human nature oscillates between fear and greed. Oh, and peer pressure.
This tends to lead us to invest in shiny objects that promise great return. Like any attack-minded team, these shiny objects will score goals for you. But over time the odds are against you winning consistently. And sometimes, if you are unlucky, and get hit by a swift counterattack by opposing forces, you could get wiped out.
The ideal situation is to create a mix of defense and attack. Everybody will have their own ideas of what actually constitutes defensive and attacking investments. There is a mathematical concept called standard deviation which is an excellent guide, but I shall not bore you with it here.
But it is sufficient to say history tells you bonds and equities issued by large well-run companies are defensive investments, as an example. It is also fair to say that FX trading, crypto-currencies, small company investments and commodities (excluding gold) are riskier and attack-minded investments.
That does not mean investing in Tesla, Bitcoin and Silver is bad (before the crypto fanatics and reddit users lynch me!). Just beware that winning in these strategies is highly unlikely on a consistent basis.
Make sure you also have invested in great companies like Microsoft, Amazon, Wal-Mart and bonds issued by the strong governments. You can access these via ETFs and mutual funds (pick the daily liquidity ones) if buying individual securities is not your preferred way to invest.
The word economy is at an interesting intersection. Covid-19 has decimated some small and medium size businesses (SMEs). This segment tends to employ the majority of people in an economy. But the valiant efforts by government to rescue their economies by spending lots of money has staved off recession.
The drop off in the SME segment has allowed the big companies to step in and fill the gap. That is why the broad equity market indices which track large companies are seeing record highs and record profits.
So, the challenge for governments and central banks is to keep their economies moving forward to allow the SME segment, and by default employment, to pick up. The roll-out of the vaccine will help matters. If it doesn’t, then we are all in trouble.
Governments have accumulated a lot of debt which taxpayers have to pay back, but with high unemployment who will pay it back? This scenario will not be good for financial markets.
I am simplifying matters, of course. There are many nuances to this story. But I believe this captures the essence of where the world stands right now.
I am personally optimistic for the future. At a philosophical level, humanity has shown a penchant for continuous progress. We will continue to open up new technologies, medical breakthroughs and economic opportunities.
Government and central banks seem determined to provide as much help as they can. Inflation does not seem to be a concern. This is a supportive backdrop for financial markets.
So, start with defense and blend in some attack. Try and pick investments that should go up as the world economy grows. Stay nimble and don’t buy anything that does not let you sell it in five minutes.
Finally, one of my favourite investing mottos – What matters is time in the market, not timing the market.