Saturday, August 31, 2013

Conversation with a client: How to handle Syria in your portfolio...

Here's yesterday's email conversation with a client. By the way, I only share conversations with clients named John Smith.
Hi Marty,

With all that is going on in Syria and other parts of the middle east, and the looming threat of attack by the USA, should I consider liquidating my funds for a period of time until things settle down?

I realize that this goes against all that long term planning stands for, but still I am quite nervous that the market is going to take a huge drop when we attack, and I would hate to lose what gains I have made thus far this year.

My fears are probably unfounded given the reality that we have had threats in the Middle East in the past.

What are your thoughts and/or recommendations for a course of action.

John Smith (the scardy cat)

Hi John,

Well, for starters, I have recommended defensive liquidations for only two clients over the past week. But, honestly, I would have recommended the same in both cases even without the looming Syria situation. In one case the client needs some cash in a few weeks (or months) to finish up a kitchen remodel. In the other, the client has an account that he's liquidating, via monthly distributions, to zero over the course of the next 12 months.

During every client review session I ask if there's any foreseeable need for cash from the portfolio. I generally like to make the cash available right away---particularly when the market's up on the year---so as to avoid the potential for selling into losses in case the market takes a large hit when they actually need the money. Otherwise, we stick to the allocation strategy.

As for Syria; if you look at this week's market action, while the major averages are down, they're down on very low volume (relatively few transactions)---which means there was nothing remotely akin to a panicky selloff. Just a relatively small number of nervous sellers, met by stubborn buyers. Oil prices have actually declined about $3 a barrel over the past two days. Gold is off as well. Meaning the markets are clearly discounting Syria as a non-economic event. Of course anything can happen.

Historically, such situations have tended to inspire selloffs leading up to the event, then, strangely enough, rallies during and after the event itself. Again, however, anything can happen.

In terms of "losing" your year-to-date gains. You haven't in fact made them or lost them until you've sold your positions. I.e., it's all on paper. The other thing to think about is, if we see a major plunge in the market, the question would be, how long will the market remain at those very low levels? If you sell, when do you get back in? If you sell, and the market rallies after the missiles are fired, and you then buy back higher, you will have blown an unrecoverable hole in your portfolio. If you sell now, and are lucky enough to buy back near the bottom, you will be cursed for life :(. Because you'll imagine you can pull it off the next time another event looms---and that's when you'll start doing some real damage to your portfolio.

And lastly, my friend, the real serious events that rattle markets tend to be the ones no one saw coming; the 1987 crash, the tech bubble bursting, 9/11, the real estate bubble bursting, etc. (and no, Harry Dent saw none of this coming). But, as you've noticed, we managed to recover from everything thus far.

Now, all that said, your comfort factor is most important. They say that the emotional response to a loss (paper or real) is more impacting on one's psyche than the response to a gain. So if the thought of watching your portfolio decline carries a greater emotional response than selling and possibly missing the next rally, you should sell. Which means, after you sell, if it doesn't turn out to be a good idea, you say to yourself, "oh well, at least I preserved what I made and it would have felt hellish to see it evaporate if the market tanked". If, on the other hand, you decide not to sell, you just go about your business---regardless of what the market does in the near-term---and stick to your long-term plan...

Hope this helps. Let me know if you'd like to discuss further...

Have a great weekend!!

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