Investing in a Whack-A-Mole Environment
Over the years my family and I have enjoyed playing Whac-A-Mole or games like it. For those not familiar, the object of the game is to hit the mole wherever it pops up. And no one knows where and when and how fast the mole will pop up.
I’m not sure the reason, but the current trade situation with the US and other countries almost feels like a game of Whac-A-Mole, but it may feel a lot more stressful than the arcade game. Perhaps it’s the recent binary nature of markets rapidly going from risk on to risk off or tariffs being on before they are paused. With all the on and off, investors may be looking at what changes are needed for their portfolios.
As a very analytical person who always wants to see the why, the how, and the details of the what, let me be as clear as possible – there are some things that are not entirely knowable – things that even the deepest bench of the smartest CFA charterholders or PhDs can’t foresee. I believe the full outcome of the tariffs and trade situation is one of those unknowable things. It’s the reason why so many have been tossing around the word “uncertainty.” So, what are investors to do, if they don’t know what will happen? The prescription isn’t all that dissimilar to what successful investors did during the pandemic – stay invested and stay diversified. It doesn’t take a rocket scientist to stay invested and stay diversified, but it does take some discipline, especially when dealing with emotions that would suggest getting out of the market is the safest move.
But why are so many investment professionals saying to tilt this way or that way or to overweight this sector and underweight that sector, if no one really knows? Fair point. There’s really two reasons, in my opinion. One, some want to make a name for themselves. Two, because many investment professionals are trained to look at all the details and to make sense of it as best as we possibly can, from a macroeconomic, fundamental, and technical standpoints. With all that deep research and analysis, the conclusion is often to incrementally adjust or tilt portfolios ever so slightly, because it’s not always black and white about what makes the most sense. There is a myriad of potential outcomes for each decision on trade and tariffs. At work are both inflationary forces, higher prices from Chinese exporters, and disinflationary forces, lower airfare and lower energy prices and lower potential consumer spending. There is the Fed. There are central banks. And then there’s Donald Trump. No one knows exactly what things will look like in 3-6 months, let alone 12 to 18 months. This is why some CEOs of public companies don’t feel comfortable giving a full year of guidance.
There may also be unintended consequences, such as supply chain disruptions, layoffs here or abroad, or unforeseen changes in rates or currencies. It’s even possible that some intended beneficiaries of the tariffs – domestic auto companies and auto workers – may be hurt for a period. Coming up with the perfect analysis and forecast about what to do and how to execute, especially when the playbook changes almost daily, isn’t easy. As they say, “if it were that easy, everyone would be doing it.”
My admonition for investors who are concerned about all the details is to keep playing the game (stay invested and stay diversified), frustrating as it may seem, especially if you feel like you or your portfolio is not even keeping up with where the mole is to whack. Don’t walk away from the game. Don’t go to cash, unless your risk tolerance is too low or you need the money soon for something else. Chances are high that if you stay invested and stay diversified, there are some things in your portfolio that are working quite well. It might feel like luck, but isn’t luck just when preparation meets opportunity? A diversified investor is a prepared investor.
What not to do is to think that you’ve figured it all out – the tariffs, the markets, the unintended consequences – and make outsized bets based on your view. Many a great money manager has lost significant amounts of assets for going all in on something that they were wrong about, especially with large bets. Sure, we will always hear about the investors that were right. Statistically, there will always be someone who got it right, just like there will be someone who wins the lottery. It could have been that their analysis was better than everyone else’s, but it’s also quite probable that luck was on their side.
So, stick with it, keep playing the game, stay invested and stay diversified if you have a long time horizon. Eventually, the game will feel a little less like investing Whac-A-Mole.
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