Asymmetric Risk

When the market cycle skyrockets, the question becomes “where will it peak?”

For investors, this is a life or death question.

We all know that a market cannot surge forever. Every market has a peak. The problem is, we can can’t “guess” for certain where that peak will be.

It’s simply impossible.

Today, we’re in a bull market. The stock market, currency markets, the real estate markets, are all on the upswing.

The stock market has been clawing its way back for the last eight years (ever since the last financial crisis knocked it over). What’s the chance it will continue to climb in the near future… 50%? 60%?

Doubtful, I think.

Whether you agree with me or not, the truth is, history repeats itself.

So many people eagerly ride the markets up and up and up…  but they don’t know when to get off the roller coaster. They stay in the market… until the bottom falls out.

And when it drops, it drops thirty, forty, even fifty percent in one week. It can take years to rebuild the original principal, not to mention the loss of return on investment… the lost opportunity.

Truth be told… you probably can’t afford a gut lurching roller coaster ride at this stage of the game. The closer you get to retirement (a stage of life where you can no longer depend on active income) the more important protecting your principle becomes.

If the markets are nearing a peak, as history suggests, this would be the ideal time to take some chips off the table. Sell, take your profit and move it into a safer sector in the market.

The question is… what is safe?

Cash is safe, but you can’t stay in cash long… or the cruel effects of inflation will systematically destroy the purchasing power of your wealth.

If not cash, than what?

The stock market is asymmetric (it lacks symmetry). The climb is deceptively slow and steady, but lurking on the other side of some hidden peak is a terrible precipice.

Let’s look at a different market: real estate.

Does the real estate market also cycle? Yes it does, absolutely it does, but it doesn’t drop forty or fifty percent in one week.

At least as long as you don’t invest in California (or the east coast).

With real estate… if you’re selective about the assets and specific local markets in which you invest, the market decline is more steady, over a period of time.

I call those low volatility markets the “boring” markets.

They aren’t flashy or glamorous. They won’t make you rich overnight. But they are where the real investors roll up their sleeves and get to work.

On average, it takes years for the effects of market downturns to be felt in select markets across the midwest.

A single family home nestled in a midwestern suburb isn’t likely to surge and plummet like a single stock. The stock market can rise and fall… at the end of the day, hard-working families in the heartland of America still need a place to rest their heads at night.

There is a predictable symmetry to the rise and fall of these markets. A gentler ebb and flow.

Does that make it a “safer” investment?

That depends. In all investing there is risk. Personally, I prefer the predictable growth found in “boring markets”…

Do you?

 

 

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