Bumps in the Road

There are frost-heaves ahead. Is your portfolio ready?

Photo: Kevin Connors. Source: Morguefile

At this time of year in New Hampshire we have to deal with frost heaves. Rain and melt-water from winter storms seep into the road-bed, then lift the road when the water re-freezes. How we deal with the bumps says a lot about what kind of people we are.

Some folks sail blithely through, figuring that their car’s shocks can handle the stress. That’s fine as long as long as they have a good suspension—and strong stomachs! Some of the bigger bumps can really rattle you. Others slow down, picking their way through, creeping over the biggest heaves. That’s fine as long as you don’t need more momentum later, like when you’re going uphill on a snowy day.

Still others start to cruise moderately through, but they seem to find perfect speed to maximize effect of the bumps. Their vehicles shake more and more violently, until it looks like their cars are skipping and hopping. From behind, you can see them bouncing inside the car. My engineer daughter tells me that they’ve found a resonance frequency that does the maximum damage.

It’s like this in investing. If you see a rough patch ahead, you can just cruise through, riding down and riding back up, if you have the stomach for it—and no loose fillings! Or you can raise cash, lowering your expected return in the short run in exchange for the peace-of-mind that comes from having dry powder. That’s the go-slow approach. But you really don’t want to be shaken around and panic, selling as the market tanks and buying back in after things get more expensive. That’s a sure way to bottom out—or get launched right off the road!

S&P 500 over last 20 years. Source: Bloomberg

Frost heaves present us with bumps in the road—like the squiggles and jiggles of the market. It’s good to know how to deal with them. Because after they subside, it will be time for mud-season.

Douglas R. Tengdin, CFA

Chief Investment Officer

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