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What If?

What If?

November 15, 2019

There's one simple yet elusive question that the current investment landscape begs to ask:  What If?

I've been talking about "what if's" with my kids for a long time, since they were much shorter than they are today, and I had more hair. I always said, it's easier to deal with "What Is" than to deal with "What If". It's easier to deal with something that is real than to deal with something that may or may not happen.

Does the same logic hold true for investing your portfolio?

I Don't Think So, But Sometimes Yes...

When it comes to managing portfolios, can we just deal with a "what if" when (and if) it becomes a "what is"? I don't think that logic completely applies to managing assets, although sometimes it does.

When it comes to managing assets to minimize risk, can you possibly determine what might happen that could impact your portfolio? And then if you think the threat is real, even if it hasn't yet come to fruition, can you adjust your portfolio? The answer to both of those questions is probably “yes.”

Can we do the same for other "what if's"? First let's be specific about these potential threats:

  • What If... the President is impeached?
  • What If... the trade wars continue?
  • What If... the Fed is not able to curtail the liquidity concerns that are now appearing in the REPO market?
  • What If... there's a global economic slowdown?
  • What If...the deficit continues to balloon?
  • You get the idea, and the list can go on, and on.

Sometimes, The Best Answer Is to Wait and See How Things Evolve

There are certain truths when it comes to investing, like valuations will always matter in the long run. But there are also "un-truths", like whenever we hear from a market "expert" that if “this” happens, then the market will react in a certain way. Predictions rarely work, except from luck.

When it comes to impeachment, for example, we don't know how the markets will react. We do, however, know what information the markets will analyze and try to digest if this happens. They will immediately turn to how policies will change under President Pence. And in-turn, how will the Pence Policies (if they're different from the Trump Polices) impact corporate profits. The markets will always be driven by corporate profits. And then markets will start to look at the same information for the next Presidential candidate in the next election, once it becomes clear who will become the next President. This is true, regardless of impeachment.

With impeachment, we have to wait and see how things will evolve. It's just too early to factor this into any of our equations. The same sort-of holds true for the deficit. While we do have to wait and see this evolution, we also know that big deficits can be very problematic in an economic downturn. (Think of losing your job when you just bought a huge house with giant mortgage.)

"What If" compared to "What Is" - The Final Word, (at least for today)

Under the heading of giving good parental advice, it's always best to deal with the "what is" and not the "what if". That's true. For managing your portfolio, we must deal with both. I would say that there's a little more emphasis on the "what is" when it comes to certain aspects, like impeachment. It is too early to tell how the markets will react. However, in other areas, it's our job to deal with the "what if's". Volatility and the potential market downturns definitely fit into that category.

It is times like these where mathematics and a disciplined approach to your portfolio matters the most.

If you need our help, we're here for you.


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