The art of long-term investing is about surviving the short run. It’s risk management 101.

This is a friendly reminder that every investment brings the possibility of gain or loss. But when the market’s rising, and everything is great, it’s easy to become complacent and focus less on the downside.

Every investment has a downside, even if you can’t see it. Random things happen. Being wrong is possible. Markets are always changing, and with it, the riskiness of your portfolio.

Prudent risk management starts with the obvious question: what can go wrong? What’s the downside? Now is a good time as any to reacquaint yourself with it.

Because when the market’s rising, and things are going well, it’s the perfect time to test the survivability of your portfolio and make any needed adjustments. Risk management only works if you prepare in advance.

Don’t just take it from me: Continue Reading…

Market history is full of wonderful lessons. Not the surface-level lessons either.

The trouble is most people gravitate to the long-run data when first looking into market history. Except, that’s where they stop.

While yes, the data is useful — you learn how the different assets performed over the last century — but it’s just averages. And averages tend to smooth out bumpy rides. The interesting stuff is hidden in those bumpy rides.

One thing we learn is that markets are dynamic. It’s in a state of constant change.

Typically, those changes swing around the average, like a pendulum — moving away from it before reverting. On rare occasions, they don’t. Paradigm shifts.

One such paradigm shift happened in 1958. For decades, stock dividend yields always stayed above bond yields. The spread between the two would fluctuate, of course, but anytime the two yields came close they acted like two magnetics repelling each other.

As stock prices rose, dividend yields fell but never below bond yields. Anytime stock yields dipped close to bond yields, stock prices (or bond prices) would fall, and the spread between stock yields and bond yields would widen again. It was a pattern that investors relied on for its consistency. And it worked well…until it didn’t. Continue Reading…