Avoiding Losses Is the Best Defensive Play
By Rev Shark
RealMoney.com Contributor
6/28/2006 9:08 AM EDT
It still holds true that man is most uniquely human when he turns obstacles into opportunities -- Eric Hoffer
Market participants are faced with a host of obstacles at present. The most daunting and difficult one is the anxiety over the upcoming FOMC interest rate announcement. Even though many investors don't expect anything positive or surprising, there is little desire to take action before this news is out. Inflation and the rise of worldwide interest rates are obviously a major problem for the market right now and that means the Fed decision carries even more weight than usual this time.
At this point, our job as investors is to continue to search for opportunities. That doesn't mean forcing trades where the odds are poor. If we can't find opportunities, then we stay patient and wait for them to develop. Quite often, success in the market is nothing more than avoiding poor action when the odds are not in our favor.
Investors often overlook the profound impact that the avoidance of losses during tough times can have on their returns. Losses not only have to be made up, but they impair the ability to more quickly compound returns. Not having to recoup a 10% drawdown is a huge advantage.
In a market like this -- one that is waiting for significant news -- our primary goal should be to make sure we keep our capital intact and not incur losses we will have to make up when conditions are better. If we can find some good opportunities, that's great, but we should be more concerned about defense right now.
The most significant thing about this market environment is the degree and pervasiveness of the macro economic gloom out there. There seems to be very few who see a light at the end of the tunnel. Eventually this atmosphere will give way to better upside trading, but trying to fight it is a good way to see your account erode. Keep that capital intact. The opportunities will come, and if you don't have to make up losses, you will be far ahead of the game.
It is likely to be another difficult day of trading. Stay patient and don't read too much into the action today. It's all just minor positioning in front of the Fed. We have a slightly positive start this morning. Overseas markets struggled and there isn't much news on the wires.