RT Journal Article
SR Electronic
T1 Leaning against the Wind: Reflections
on Institutionalizing Countercyclical Investment
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 85
OP 89
DO 10.3905/jwm.2013.16.1.085
VO 16
IS 1
A1 Bradley A. Jones
YR 2013
UL https://pm-research.com/content/16/1/85.abstract
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