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  1. Home
  2. / Investing

The Market Reality We Live Through

We can counter the uncertainty of markets by taking a defensive posture at times.
By BOB LANG
Oct 11, 2021 | 11:30 AM EDT

As investors and traders, we all wish we could constantly be on the right side of the market. When it's screaming higher we would be fully invested but when the market turns south we would be heavily in cash or even short some stocks. But that is not the reality we all live through, nobody could ever be that lucky.

Market outcomes are mostly uncertain. If we believe in the principle of efficient markets where all information is disseminated to everyone, then in theory nobody has a time advantage. But again, in reality this is just not true. However, we could argue that the markets are semi-efficient, and that could explain a bit of the advantage some have over others. 'That's not fair', you say? Well, life is not fair sometimes.

But we can counter the uncertainty of markets by taking a defensive posture at times. Let's face it, we have to step onto the risk curve in order to earn something better than a cash return (which is close to zero). Do you feel safe in bonds? It might be safe but with the 10 year yielding 1.5%, that is just under half of the rate of current inflation. In other words, you're getting a negative yield!

When you have exposure to equities and risk then, you have an opportunity to make a good return. If you've had your money in the SPX 500 this year, a well-diversified portfolio, you would be up more than 15%. Not bad, even with a sharp spike up in inflation this year you would be way ahead. But the future is uncertain, and as we prepare to transition into another phase of Fed policy the equity opportunities may be fewer.

Why do I say that? Basically, a tighter Fed policy, which we all believe is coming but we don't know when - is a signal to take risk off. Now that doesn't mean sell everything and go to the sidelines, it simply means having awareness of what is happening around you and being more defensive than before. Raise some cash, have some protective puts. Live to fight another day.

Markets will drop again some day, like in 2020 and 2008 and 2001. Can you withstand the punishing blows, or will you make adjustments to help you sleep at night without any nightmares?

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At the time of publication, Bob Lang had no position in the securities mentioned.

TAGS: Federal Reserve | Investing | Markets | Stocks | Trading

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