January 25, 2018

The Dangers of Complacency in Investing: Four Steps to Position Your Portfolio for the Future

When things have been good for a long time in the market, the human mind naturally adjusts and builds its idea of “normal” around the current environment. This “new normal” sets the stage for future decision-making. But beware of this tendency, because it can be deceptive! Since it’s impossible to predict future market movements, investors should base their strategy on a long-term plan, not on the current environment.

An indication of complacency in action is the VIX Index. The VIX Index is based on S&P 500 Index options, and indicates the market’s expectation of 30-day volatility (sometimes also called the “investor fear gauge”). The VIX Index rarely dips below ten – between 1990 and 2016, it did so on only nine days total. In 2017, however, the VIX spent 52 days below ten, indicating that options traders have been anticipating near-term smooth sailing.

Source: Chicago Board Options Exchange (CBOE)

The question is: are investors being lulled into a sense of complacency by a long bull market?

The best way to be prepared for what the future brings is to build a long-term strategy designed to serve you in any kind of market. Here are four steps you can take to position your portfolio for the future:

Make sure you are adequately diversified: Make sure your long-term strategy is well diversified across a variety of asset classes.

Rebalance to target: Rebalancing essentially locks in your gains, while maintaining your long-term strategy. When stocks are booming, it can feel difficult to sell them, but that’s the goal of buying low and selling high. Don’t wait for a dip in the market; rebalance and maintain your long-term targets.

Use active management: When the market changes, it often does so very quickly. Active managers are able to position portfolios to weather market downturns and take advantage of different environments. Research has shown that active management is more likely to outperform in down markets.

Consider using hedge vehicles and/or private markets: When it comes to providing downside protection for your portfolio, hedge vehicles have a number of advantages in their ability to provide risk management and diversification. Private equity is another avenue to achieve diversification outside of public markets.

Don’t let complacency get the best of you; think long-term and be strategic about your investment portfolio, regardless of what the current market environment looks like.