PT  - JOURNAL ARTICLE
AU  - Bradley A. Jones
TI  - Leaning against the Wind: <em>Reflections</em>
               <br/>
               <em>on Institutionalizing Countercyclical Investment</em>
AID  - 10.3905/jwm.2013.16.1.085
DP  - 2013 Apr 30
TA  - The Journal of Wealth Management
PG  - 85--89
VI  - 16
IP  - 1
4099  - https://pm-research.com/content/16/1/85.short
4100  - https://pm-research.com/content/16/1/85.full
AB  - 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.TOPICS: Wealth management, portfolio construction, risk management, financial crises and financial market history