Leaning against the Wind: Reflections on Institutionalizing Countercyclical Investment

For any number of reasons, the principles of contrarian investing can prove exceedingly difficult to put into practice particularly in the heat of battle. In response, I propose four relatively straightforward ways in which long-term investors might look to build a defense against the damaging effec...

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Bibliographic Details
Published in:The journal of wealth management 2013-07, Vol.16 (1), p.85-89
Main Author: Jones, Bradley A.
Format: Article
Language:English
Subjects:
Annual reports
Asset allocation
Bear markets
Benchmarks
Bond portfolios
Contrarian investing
Investments
Investors
Long term
Risk management
Risk premiums
Standard deviation
Studies
Valuation
Volatility
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Summary:For any number of reasons, the principles of contrarian investing can prove exceedingly difficult to put into practice particularly in the heat of battle. In response, I propose four relatively straightforward ways in which long-term investors might look to build a defense against the damaging effects of pro-cyclical investment. These include: 1) recalibrating estimates of risk more consistent with valuation-based risk premiums than price volatility (price volatility and valuation risk have been negatively correlated at key turning points in the U.S. stock market over the past century); 2) eschewing price-based rebalancing in favor of a valuation- based alternative; 3) communicating to stakeholders a sense of short-term (unrealized) losses that should be expected in pursuit of longer-term objectives; and 4) rethinking the opportunistic role of cash, as a key comparative advantage for long-term investors is the counter-cyclical market-stabilizing provision of liquidity during liquidity droughts when risk premiums are typically widest. [PUBLICATION ABSTRACT]
ISSN:1534-7524
2374-1368
DOI:10.3905/jwm.2013.16.1.085