• Built-in forecasts: “The next recession is coming, and with it a bear market loss of at least 40 percent, if not 50 percent.” Perhaps, perhaps not. But here's what I can tell you for sure about these forecasts:
1. Humans make terrible forecasters, especially about stock markets.
2. Managing money toward a forecast produces awful results.
3. All forecasts are marketing.
• Emotional management/discipline: Even the greatest trading strategy is worthless if you lack the discipline and emotional fortitude to stay with it. Wes Gray of Alpha Architect notes that even an omniscient God would get fired by his investors during market volatility’s severe drawdowns because they lack the discipline to stick with it.
The alternatives to buy and hold involve tasks that are beyond most individual investors and many professional ones. Instead, consider a globally diversified portfolio, including asset classes that are less correlated to equities: corporate bonds, Treasury inflation-protected securities, and Treasuries. A portfolio that is 60 percent equities and 40 percent fixed income should suffer drawdowns of about 26 percent to 28 percent in markets that get cut in half, such as 1973-74 or 2008-09. If you cannot live through a 25 percent pullback in the value of your portfolio, you have no business owning stocks.
As we keep reminding you, there is no free lunch -- and that includes market timing and hedging strategies.
This column was provided by Bloomberg News.