Risk management is the core of all forms of management. The definition of risk stems from uncertainty, often being classified by sources of uncertainty. Political risk refers to political instability, among other things. Conventional wisdom would suggest that presidential elections increase political instability. Therefore, if I were a betting man, I would have been placing bets that the market's reaction to an inconclusive election last week was erase all of its most recent gains. As we know now, the market's actual reaction was to soar higher! The Dow even set new record highs this week.
I was recently asked whether I thought markets would still be overpriced at 2018 values today. My response was that once I learned the market does not care what I think, I stopped gauging my market moves based on what I think should happen. I would have placed my money on markets retracting from its gains during a depressed job market and an intentional economic slowdown as a response to the global pandemic. Maybe I know better what the market should do than the market itself. Probably not.
Then again, the nature of risk is that the higher the risk, the higher the return. Perhaps it is not fully unreasonable to question this strong reaction in the face of such uncertainty (plus, the majority of the gains I am referencing occurred after most media outlets had projected a winner, and the latest included early reports of a Coronavirus vaccines). Whether or not I know better, it is truly irrelevant and my decisions should not be based on what I think, much less what I think I know.
In market lingo, those "betting men" are called day-traders. The size of their losses can match the size of their gains, and in the end, day trading results in a below average risk-adjusted return.
For wealth preservation, risk management is tantamount to its success. Thus, instead of taking bets on how the markets will react to any given situation, managing the majority of active portfolios through dollar-cost averaging and periodic reallocations will provide better risk-adjusted returns. When the market introduces strong elements of risk or volatility, an emotional response is innate to the human condition.
In my case, this quarterly reallocation consisted wholly of removing increases (approximately 1.3% of total portfolio assets) from all funds except Total Bond Market Index, so I directed those assets into that one fund.
