Over time I discovered that I am a natural contrarian.  This trait often means that I am always the guy in meetings who plays “the devil’s advocate” to challenge assumptions; the guy with the quip in social settings that twists words in a funny (I hope!) way, etc.  While this trait can sometimes be taken as being difficult, in general I have found it to be useful, especially when it comes to investing.

At its most fundamental, making money through investing comes down to the age-old practice of “buy low, sell high”.  While this seems obvious, it is incredibly difficult to do in practice because we are human.  Ask yourself, when is it easiest to invest?  Is it when the market is crashing, the world seems to be chaos, fear is the predominant emotion?  Nope, it is emotionally easy to invest when the markets are calmly climbing to new heights.  The same is true in reverse; it is easiest to give into fear and sell when markets are down.  In other words, it is emotionally easiest to “buy high, sell low” – the exact opposite of what we should do.

To invest well, we need the ability to put our emotions aside, or at least process them effectively so we can make rational decisions rather than emotional decisions.  My natural tendency to be contrarian serves me well here.  I tend to get more worried when markets climb and less worried when they fall.  Part of this comes in the simple knowledge that markets are never “one-way streets”; they never always go up or always go down.

A phrase I have often used when I talk about markets is “Three Steps Forward, Two Steps Back”.  If I could wave a magic wand and make the markets behave in a nice, neat, consistent way, it would follow this +3, -2 pattern.  We would have efficient markets with both buyers and sellers all cooperating to create a gradual upward trend.  This is a nice fantasy that will never be true. 

But this is also an effective way to see how my contrarian perspective comes into play.  If the market takes 27 steps forward, I just expect it to eventually take 18 steps back.  We end up in the same place, just with more volatility.  Similarly, if the market takes 18 steps back, I expect it to eventually take 27 steps forward.

We have seen quite a few steps forward over the past year… that means I’m expecting some steps back.  That isn’t a prediction based on time, events, valuations or anything else other than just that contrarian nature bubbling up.  I am NOT afraid of the steps backward; those are just part of the process.  But it does mean I get more cautious with portfolios, rebalance more regularly and deploy cash more slowly.

Managing your emotions and keeping a level, long-term perspective are both important habits for investors (and it doesn't hurt to be a bit of a contrarian!).  Keep that in mind as this market continues to take significant steps forward.

NOTE: Asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment losses. Investments are subject to market risks including the potential loss of principal invested.

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