Not many people deal effectively with the emotions that arise when a fully invested portfolio suddenly takes a massive dive. The biggest risk is not what you imagine. It’s what you don’t see coming. Most of the biggest black swan events of the past were completely unexpected. Nobody predicted the October 19, 1987 stock market crash that wiped out almost a quarter of its value in a single day. Who had Saddam`s Kuwait invasion on his risk list? Or the collapse of Long-Term Capital Management, a highly leveraged hedge fund overseen by Nobel laureates in 1998. The list is long: 9/11, the fall of Bear Stearns and Lehman Brothers or the covid-19 pandemic, among many others.
Who predicted these extraordinary events? No one. And who will predict the next one? Nobody.
Do not try to predict the market and guess what is coming next. You cannot! The best protection is diversification of a fully invested portfolio. Do not just reduce your risk but diversify through an active asset allocation that includes asset classes and investments with negative correlation. We simply can’t know what will be next or when it will occur. We do not have the magic crystal ball. So diversify because you won’t see it coming.
Sven Franssen