It all looks so easy on paper, but in real time, using real money, making strategic investment choices is hard. Especially during a banking crisis that threatens the broader global economy.
Each January, we offer an historical chart of how the major asset classes fared on a calendar year basis, starting with the recently ended year and going back several years. Here’s what we published this past January–see table at end of post. Looking at this history leaves the impression that one can easily sidestep danger and favor the winners over time. In fact, looking at the past and managing portfolios in real time are equivalent only in the sense that both are focused on investing. But one and only one is immensely difficult, and the reason has as much to do with managing emotions as it does with informed financial analysis.
There are many ways to manage the various pieces of the global market portfolio. We can exclude certain pieces, load up in others or own everything, either in a passive market-value-based mix or by way of an alternative methodology, i.e., active management. But no matter how we manage our portfolios, we must make decisions, all the more so at extreme points in the cycle. At the very least, rebalancing the mix, according to some preplanned strategy, is critical. The exception is building a passively weighted portfolio that self adjusts, thereby remaining weighted as per Mr. Market’s portfolio and effectively putting the rebalancing on auto pilot. But even there, we must decide how much cash to hold, if any, in relation to owning the passively managed global portfolio and how that cash/risk portfolio mix should change over time.
The point is that decisions must be made at times. Invariably, some of those decisions will be wrong. But doing nothing solely because of fear, when reasoned analysis suggests action, is a mistake. A strategic mistake, and perhaps one that will forever haunt us.
Indeed, the only thing worse than watching one’s portfolio get crushed is doing nothing during or afterwards, once prices have dropped sharply. No, we don’t know where the bottom is, or when it will arrive. Our leap of faith is that a rebound will one day come. Could be on Monday, or several years from now. We simply don’t know, but we can’t risk assuming it’s never coming or that it’s so far off in the future that there’s nothing left to do but sit idly for years.

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If not the decade, depending on how all this plays out. In any case, Carl Weinberg, chief economist at High Frequency Economics, cuts through the fog and goes right to the heart of the challenge, in a quote from today’s New York Times:
“The core problem is that the smart people are realizing that the banking system is broken. Nobody knows who is holding the tainted assets, how much they have and how it affects their balance sheets. So nobody is willing to believe that anybody else isn’t insolvent, until it’s proven otherwise.”
And until there’s some reasonable degree of certainty as to where the bodies are buried–and not buried–the pain will go on. Here’s one naive idea for a step in the right direction: All banks and financial institutions publish a list of their holdings on their web sites so everything body can see who holds what. Yes, for some institutions this is going to be a complicated list. Accountants, bloggers and everyone else can then start weighing in. Some of the holdings are already widely known, of course, particuarly among publicly traded institutions. But there’s still a fair amount of mystery out there, and mystery is exactly what we don’t need at this point. More transparency–complete transparency is needed. Urgently needed. Granted, that’s just step one in a thousand mile journey, and it’s no silver bullet. But it would help. And it won’t cost $700 billion either.