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Managing the Market Menagerie

Have you ever noticed how often we compare market conditions to the animal kingdom? There are the long-familiar bulls and bears. Given the hoopla we’ve seen so far in 2016, perhaps the market knows that it’s the Chinese year of the monkey, a period of heightened tumult and trickery. We’ve also seen the market compared to the fabled tortoise and the hare. With a nod toward spring, there’s the related notion that we might be in a bunny market, in which returns are seen hopping up and down – but to what end?

In our opinion, the understated hippopotamus seems to best represent the market’s most important characteristics. (I did not make up this analogy, by the way. Most recently, Schwab has referenced the term, although they didn’t coin it either.)

Hippos are known for trundling along, slow and steady, generally minding their own business. But make no mistake. Underestimate these unapologetic beasts at your own peril. As described in this 2011 market commentary from the UK’s Telegraph, “[H]ippos kill more people every year than any of the more obviously dangerous animals. They are more numerous than predators and tend to flatten anyone who accidentally disturbs their slumbers.”

The evidence-based investor is wise to consider the market in a similar vein.

Over time, there is ample evidence that the market’s rough edges smooth into an uphill trudge – relatively unremarkable, relatively dependable. Sort of like that hippo.

For example, what with all the monkey business that’s been going on lately, you may have missed the fact that we’ve just passed the seven-year anniversary of one of the longest bull markets in the history of the U.S. stock market. The few articles we’ve seen covering the news have been accompanied by headlines such as “A wheezing, unloved bull market tries to keep running,” and “Despite old age, bull market gets no respect.” It’s been hard to see the market’s dependability through the investor’s unease.

Investors who have been carefully managing the risks involved in participating in this underappreciated bull run have likely captured appreciable measures of its available returns. “Careful” has meant capitalizing on the market’s power and determination, while respecting its significant risks. This translates into two recommended strategies for evidence-based investors:

  1. Avoid active investing. Do not try to interfere with the market in an up close and personal way. Avoid chasing its next moves or hunting down the hot stocks. These sorts of active encounters can turn lethal, fast.
  2. Manage risk with effective diversification. Remain globally diversified. While the U.S. markets have been enjoying better returns lately, history has repeatedly shown us how swiftly that table can turn. This also includes allocating a portion of your investments to the more temperate bond market, in accordance with your personal financial goals and risk tolerances.

In short, we recommend you appreciate the power of the hippo market, but keep yourself at a comfortable distance from it. You and the hippo alike will be happier that way.

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