Why a Single Trading Strategy is Insanity

I'm returning to one of my recurring themes today because I found a great blog post by The Pragmatic Capitalist:

"Nassim Taleb is the analyst community’s biggest critic.  He recently said: “We have to build a society that doesn’t depend on forecasts by idiotic economists.”  This goes back to our flawed system of thinking.  Too many investors have been suckered into the belief that one investment approach is the best way to invest.   Can you imagine if an Army General had ONE battle plan?   Every war is different and requires a unique battle plan.  Economic cycles aren’t so different [from wars].  Each cycle is different and each cycle is going to reward different assets in different ways.  But investors have been schooled to believe that you can apply one school of thought or one investment approach to each cycle...

The same can be said of buy and hold for many small investors.  Unfortunately, we’ve discovered over the last 10 years that buy and hold isn’t always applicable.    All economic cycles are unique and asset responses to each will vary widely.  Investors need to learn that a multi-strategy, flexible approach is the best approach."

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I believe the above quotation sums it up nicely.  Buy and hold was good advice as the markets soared from the end of the depression through 2000 - with some notable pauses along the way.  But for analysts to claim that the markets are bound to hit new recovery highs anytime in the foreseeable future are simply pie-in-the-sky wishes - as far as I'm concerned.  We can never know - in advance - which is going to be the best strategy going forward.  Thus, prudence, conservatism and insurance are essential for long-term success.  Why is that so difficult to understand? 

Investors should continue to invest - but only when their portfolios are insured against a disaster.  Without insurance it's just another form of gambling.  And if that insurance limits the upside, what's so terrible about that?  Isn't it better to be sure you have a nest egg when you need it - even if it turns out to be a smaller nest egg than it might have been had you not bought insurance - as opposed to being in need and not having the wherewithal to retire at all, let alone retiring comfortably?

Why don't financial journalists jump on this bandwagon?  Why don't all financial planners and advisors see the merits of sacrificing some upside for a guarantee of no more heavy losses?  I know it's not that simple.  Even if everyone were suddenly to decide that owning collars for all investments was a very sound, intelligent idea (which I believe it is), who's going to make all those option trades for the masses of individuals who need to make them?  That's the biggest hurdle. Educating people on how to protect their assets.

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