EC The Cost Of Sidelining Your Capital

In the waning stages of 2014, investors are starting to look closely at their returns and analyzing the pros and cons of their portfolio decisions this year. Overall the gains have been solid across the board for stocks and bonds with the exception of some errant sectors that have been misplaced. Energy stocks, precious metals, and commodities have been the focus of wrath from the inflation camp and continue to prove that trends matter.

The chart below shows year-to-date performance for the SPDR S&P 500 ETF(SPY), Vanguard Total Bond Market ETF (BND), and PowerShares DB Commodity Index Tracking Fund (DBC).

The real losers this year have been those that have either bet against the market or taken their chips off the table too soon. Attempts to call a top in stocks or bet on rising interest rates have been fraught with failure despite the noble goal of capital preservation.

One of the hardest things with sidelining your capital is deciding if and when to get back into the markets. Even a perfectly timed sell at a market high is a fruitless endeavor if you don't buy back in at lower prices or reallocate to another asset class that is signaling a more attractive opportunity. You are simply defeating the purpose of active management.

I fully understand the argument to be had that stock valuations are too high, the Fed is going to raise rates, social unrest continues to rule news cycles, economic calamity is striking other continents. The list goes on and on in an endless wall of worry that headlines websites such as MarketWatch that prey on your fears.

The thing you need to remember most is that fear is not an investment strategy. Fear leads to emotional decision making that rarely results in a positive outcome. Regardless of the short-term relief that it can provide, capitulating at a low or buying at a high is a high risk/low reward proposition.

I've said it before and I'll say it again – the market isn't logical, it is psychological. It will suck you in at the wrong time and spit you out when everything seems great. For that reason alone, it's important to take a counter intuitive mindset to manage risk and still maintain a cogent asset allocation at this stage of the game.

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