Whenever the market moves violently in one direction or the other we tend to ask questions after the fact. In recent days the stock market has been falling rather rapidly. And people want answers. But I find this questioning misguided. Who cares why the stock market went down. Answering that question serves no purpose. You don’t get your money back if you find the answer. You don’t get a prize. All you get is some comfort knowing that you know why something happened after the fact. And that’s not worth a whole lot.
The more important question is “why should the stock market rise?” Or better yet, “what if the stock market declines?” These questions get us to think in a proactive manner. These questions force us to think in a critical manner. The world of asset allocation isn’t about being reactive. It’s all about being proactive.
It’s fashionable to bad mouth people who make forecasts and people who “manage risk”, but the reality is that all smart asset allocation involves risk management and forecasting. We are all putting together a portfolio of assets and trying to interpret how we can best reduce risk while achieving our financial goals. The only way to achieve this is to think in a proactive fashion because once you’re the person asking “why did the stock market decline” you’re the person who is being reactive. And once you’re reacting to the market’s moves you’re likely already behind the curve.
Smart asset allocators prepare rather than react. They ask themselves the scary questions before those scary questions need to be answered in real life. Market declines shouldn’t surprise you. And they shouldn’t worry you. That is, of course, unless you’re not prepared. And to be prepared you have to be asking the right questions.