Investing Like Water
I’ve been thinking about water.
I know that might seem like an odd thing for a financial professional to think about. Especially during times like these, with interest rates on the rise, inflation remaining stubbornly high, and volatility dominating the markets.
But, as investors, this is exactly the time to think about water.
To illustrate what I mean, consider this quote, usually attributed to the great Chinese philosopher, Lao Tzu:
“Consider that nothing is softer or more flexible than water, yet nothing can resist it.”
Even in the best of times, many investors are rigid and inflexible in their approach. It’s in the hardest of times that this rigidity comes back to bite them. For instance, many investors take the approach that they must stay invested all the time. Since the whole point of investing is to grow your money, they are constantly in growth mode. In reality, though, investors like this simply fear missing out on future growth. As a result, they are constantly climbing towards the top of the mountain, even when the cliff becomes straight and sheer, without a single ledge or toehold to cling to.
As of this writing, the S&P 500 is down 21% for the year.1 Last Friday, September 30, it was down over 25% from the peak. Perhaps that slide will continue, perhaps it won’t. I don’t know; no one does. What I do know is that, when the cliff gets sheer, it can be a long drop down to the bottom.
Other investors, perhaps burned by this approach, become inflexible in another way. They sit out the markets permanently, or invest only in bonds, or some other approach that makes them feel “safe”. Better to risk gaining nothing than to risk losing anything. As a result, these investors never move at all. They simply stay where they are…even if where they are isn’t where they want to be.
Despite the volatility we’ve seen this year, the S&P 500 is up nearly 72% since March of 2020.1 Perhaps that number will go up, perhaps it won’t. I don’t know; no one does. What I do know is that I’d hate to miss out on that kind of journey.
Now consider water.
Have you ever seen a major river from above? If so, you’ll have seen how it always takes the easiest course. Sometimes it flows straight; sometimes it bends and curves back on itself. Sometimes it flows fast and strong; sometimes, it barely moves at all. It cannot fight against gravity, so it never tries to go uphill. But it always keeps moving, from source to destination.
When you think about it, our entire investment philosophy here at 2nd Half Wealth Advisors is based on emulating water. As you know, we use technical analysis to help us find and follow market trends. Sometimes, the markets trend up. Sometimes, the markets trend down. Sometimes, the trend is short; other times, it’s long. Sometimes, different sectors of the markets will trend in different directions. (This is why we don’t try to invest in everything, but choose our investments based on their relative strength compared to other, similar investments.)
Whichever way the trend goes, though, we don’t fight it. Like water and gravity, we know that you can’t fight it. Instead, we adapt to it. When the trend is down, we may move into cash to protect against undue risk. When the trend is up, we do the opposite. Sometimes, this shift may occur month to month or even week to week. But we are always on the lookout for opportunities to help you pursue your financial goals. Like water, we try to follow the path of least resistance, adapting our approach to the lay of the land. Sometimes we will be in growth mode; other times we will be defensive. Just as water will speed up or slow down, flow straight or curve backward, sometimes we will, too.
Experience has convinced us that this approach – being flexible and adaptable – is the surest way to your destination. By not trying to constantly scale the cliff, we do not risk the fall. And by not being afraid to move, we do not risk forever staying in one place. By being like water, we stay soft, flexible…and irresistible.
The reason I’m telling you all this, is because investors have so much noise to contend with right now. On Tuesday, September 13 alone, the news came out that the inflation rate for August was at 8.3%, higher than many experts hoped for.2 This means it’s even more likely that the Fed will continue to raise interest rates, which is hardly welcome news for most companies. The result? The Dow fell over 1100 points.2 For rigid, inflexible investors, numbers like this represent a major obstacle. Some will crash into it in their attempts to plow through. Others won’t even bother trying. For us, however, it’s merely another data point.
Over the coming weeks, it’s possible we’ll have more days like September 13. I don’t know how long this volatility will continue; no one does. Either way, our strategy will help us get around it. So, while the headlines might seem scary, I hope you take comfort in the fact that we’ll continue adapting to changing market trends with great flexibility, all based on your needs and goals.
We’ll be like water.
As always, please let me know if you have any questions or concerns about your portfolio. My team and I are here for you.
