Client Portals

The Perils of Pessimism3 min read

Jul 18, 2018 - John Osbon ( 4 mins to read)

In 2010 I got two client inquiries to create an “Armageddon Portfolio,” a collection of assets that would hold its value come hell or high water. Recall that we had just pulled out of the financial crisis. Many expected a repeat. For some, pessimism was so high in 2010 there was no expectation for an increase in asset value; just maintaining value was plenty. What happened next?

The world didn’t end

We did assemble an Armageddon Portfolio (AP) for those two clients. To do so, we dialed down stocks and spread more money into assets that react more calmly in turbulent times — bonds, gold, the Franc, real estate. Of course, the bull market in stocks has raged on ever since. The AP did what it was supposed to, compounding a little over 4% per year. It stayed ahead of inflation. Dividends helped. But it significantly lagged the more typical stock-rich portfolios that have performed so well since the market bottomed out almost a decade ago.

Armageddon knocking?

In 2010 many investors were worried about a double trough, a return to the financial crisis and recession that led to sharp asset declines across the board. Such worry is common among some professionals and individuals, today as then. I would not be at all surprised to get the same kind of maximum pessimism inquiry again in July 2018. The likely reasons are 1) the cycle is past due (okay, but the previous stock cycle lasted three years longer than this one) 2) our President is erratic (yes, but a large number of people think each President is erratic) 3) a world war is coming again (not impossible, but we haven’t had one for three generations) and 4) various…Fed portfolio runoff, terrorism, tariffs, interest rates, elections, foolish young people and so on.

Pessimism at your own risk

In general, we must warn against the excessive pessimism that launched the Armageddon Portfolio. There are always reasons to expect the worst and they rarely pan out. A century of investment data shows how resilient the markets are over the long term, and how hard they are to predict in the short term. It’s almost impossible to catch major turning points like peaks or valleys and it’s very tough to pick the securities that will behave exactly as you expect at those turning points. It’s certainly okay to dial down your risk if you are worried, or if your life has changed. Its prudent to ask your advisor to check and re-check your portfolio to make sure you are appropriately invested. In fact, I recommend those in all cash due to a buyout or IPO to take a gradual approach in re-investing in a diversified portfolio — patience spreads out the risk.

The reward for realism and optimism

With diversification, cash flow, frequent communication and requests for proof you can manage your way through the inevitable peaks and valleys of investing. The valleys may be sharp and deep but the peaks are higher and last longer. That is a good description of investing since the end of World War I. Right now I sense investment pessimism. And I don’t believe that a strategy primarily informed by pessimism is a good investment plan. The world rarely ends.

delivered to your inbox


This communication may include forward-looking statements. All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”). Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”

“Historical performance is not indicative of future results. The investment return will fluctuate with market conditions.

Past performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor.

Investment strategies, philosophies, allocations and holdings are subject to change without prior notice.

This communication is intended to provide general information only and should not be construed as an offer of specifically tailored individualized advice.

While the Adviser believes the outside data sources cited to be credible, it has not independently verified the correctness of any of their inputs or calculations and, therefore, does not warranty the accuracy of any third-party sources or information.

Adviser does not endorse the statements, services or performance of any third-party vendor.

Unless stated otherwise, any mention of specific securities or investments is for hypothetical and illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.

Any IPO alerts are purely informational and should not be construed as recommendations to invest.

Adviser is not licensed to provide and does not provide legal, tax or accounting advice to clients. Advice of qualified counsel or accountant should be sought to address any specific situation requiring assistance from such licensed individuals.

Any case studies or hypothetical client profiles are for demonstration purposes only. They illustrate the breadth and depth of the many clients we represent at various life stages. Any similarities to actual Adviser’s clients past or present are strictly coincidental. Individual advice and results will vary based on each client’s circumstances, objectives and prevailing economic conditions.