Among other things, good money management involves
trading around a core position, with the core position being in synch with the
long-term trend. In particular, during a strong intermediate-term rally it
involves 1) maintaining core exposure in line with the long-term bull market
and 2) methodically scaling back to core exposure as prices move sharply
upward.
BOTH of the aforementioned tactics must be used to
mitigate the risk of suffering a large loss AND the risk of suffering a large
opportunity cost. For example, if you don’t sell anything during a strong
rally then you are guaranteed to suffer a large loss once the inevitable
ensuing decline occurs and you won’t have either the financial or the
emotional capacity to take advantage of future buying opportunities. For
another example, if you sell everything when you think that the market is
close to a top then it will just be a matter of time before you find yourself
on the sidelines with no exposure as prices move much higher than you ever
thought possible.
In more general terms, good money management involves
embracing the reality that while it is possible to measure — by looking at
sentiment and momentum indicators — when a market is stretched to the upside
or the downside, it is not possible to RELIABLY predict market tops and
bottoms. It is not even possible to reliably identify important market tops
and bottoms at the time they are happening. Fortunately, and contrary to what
some self-styled gurus will tell you, achieving well-above-average long-term
performance does not require the reliable prediction of tops and bottoms.
With regard to my own money management, this year’s rally
in the gold-mining sector was the first rally in years that was strong enough
to prompt scaling back all the way to ‘core’ (long-term) exposure. This
entailed selling almost half of my total position.
I might do a small amount of additional selling if
there’s another leg higher within the next few weeks, but I have built up as
much cash as I want so my next big move will be on the buy side. However, I
will not do any buying into extreme strength. I will, instead, wait as long
as it takes for the market to reach a sufficiently depressed level, secure in
the knowledge that my core exposure covers me against the possibility of
‘surprising’ additional short-term strength.
This blog post is a modified excerpt from a TSI
commentary published a week ago.
