Last week we presented the views of three commentators and summed it up by saying “It’s Time to Play Defense.”  That generated more responses than usual, so this week, we drill a little deeper by asking How do you play defense in the current market environment?”

More from Howard Marks. “It seems most people in the prediction business think the future is knowable, and all they have to do is be among the ones who know it…I’m solidly convinced the future isn’t knowable,” Howard Marks said in his latest memo we referenced last week.  Marks also points out a new risk that has arisen in today’s environment:  “Fear of Missing Out” can drive an investor to do things he shouldn’t do.  At bottom, he says, “the riskiest thing is overpaying for an asset (regardless of its quality), and the best way to reduce risk is by paying a price that’s irrationally low (ditto)…Valuation risk should be easily combatted, since it’s largely within the investor’s control.  All you have to do is refuse to buy if the price is too high given the fundamentals.”

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Get Your Buckets in a Row. A concept that has helped some clients sleep better at night is the “bucket approach” for retirement planning, explained in this piece by Morningstar.  With the “bucket approach”, investors divide their retirement assets into buckets to serve different purposes.  The first bucket is to cover near-term living expenses of one to two years.  With the first bucket in place, you can let those longer-term assets fluctuate day-to-day, month-to month as they might, but knowing that probably over time they’ll work harder for you.  The second bucket will contain some intermediate-term assets, and generally provide a conservative mix of stocks and bonds.  These assets could be next in the queue; once bucket number one is depleted you replenish bucket number one from the second bucket, which hold assets to be used over the next 3-10 years, depending on client preferences.  The third bucket is the long range one—assets invested mostly in equities that would cover you in years 10 and beyond of your retirement.

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Three Mistakes Investors Keep Making Again and Again.  Successful investing requires avoiding common mental and emotional pitfalls.  It is important to be tuned into your willingness to take risk.  Buying high and selling low has cost the average investor anywhere between one percentage point and four percentage points a year in lost return over the long run.  The late Benjamin Graham emphasized the importance of a margin of safety, “rendering unnecessary an accurate estimate of the future.” Another important lesson is to keep a cool head during market drops, realizing how common they are.  The Wall Street Journal (Registration required)

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J. Mark Nickell &  Co.

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