In my pre-adolescent years, I had access to a small private lake on a property my parents owned with several other families. I always wanted to be out on that lake, but the outboard engines, gas tanks, and batteries associated with power were too heavy for me to carry from the boathouse down to the water. So instead of using motors, I learned to row.
First thing in the morning, I would grab my little blue tackle box, rod, and reel and head to the water’s edge. Most days, Barney, our Springer Spaniel, would also come along. The mornings were usually calm and quiet as we rowed towards the stumps and cover that held the best fishing.
After a few hours of fishing, the wind would inevitably pick up and blow out of the southwest. Getting back to home base became tricky. While still learning, there had been days when the wind blew Barney and me clear to the other side of the lake, trapping us against the spillway. Eventually, my dad would come out to my rescue with a motorboat and tow me back to camp.
Over time, I learned how to adjust my heading, so this would not happen. While looking over my shoulder, I would point the little Ouachita boat to the windward side of my intended path, then find a landmark directly behind me. Keeping the stern pointed at my landmark, I would row like the dickens. Every few minutes, I would peek over my shoulder and adjust my heading to arrive home safely.
Years later, as a Naval Officer, I would know these wind and current forces as set and drift. I would calculate their effects mathematically and use my skills to safely navigate warships in restricted waters and on the high seas.
Now, as an asset manager, I see similarities between the effects of winds and currents on ships and market forces on an investment portfolio. All of these forces are external and entirely out of our control. A “set it and forget it” approach to investing does not consider the changing forces of the market and the economy. At the same time, we must be careful not to over-adjust. I once fearfully watched from the USS Niagara Falls flying bridge as her captain nearly dashed us into the rocks by overcompensating for the fierce currents at the mouth of Apra Harbor, Guam.
Timing the market has never made sense to me, either. This strategy suggests you shut down the engines and drift aimlessly off course just as things get bad. Then, after conditions improve, you ring up all bells to try and get back on course. The right approach is to make small course corrections based on careful observation.
Today, as I peek over my shoulder at the distant shore, I see that interest rates have risen quickly, and market volatility remains high. As I turn around and carefully pick out an adjustment to the portfolios, I add some structured income notes. Market volatility has recently created favorable terms for structured notes, and they do not lose value against rising interest rates as bonds do. We execute trades as I lean into the oars to move directly and steadily towards the intended destination.