Nervous? Diversify Early, Rather Than Trading in a Panic

Last Friday, I was sitting in a local Starbucks with a colleague, between client meetings, when a friend -- a former Morgan Stanley broker -- pulled up a chair and joined us.

He's a smart guy who studies economics for fun. He reads my columns in the Santa Fe New Mexican, in which I take a practical, rather than "pie in the sky" approach.

As you may have noticed, I do the same here, avoiding smart-sounding predictions in favor of actionable strategies to preserve capital and generate the necessary amount of income.

At one point, he mentioned something along the lines of being less optimistic than I am. I knew what he was alluding to: By continually reminding readers of the historical truth that markets do work, I invite charges of being naive or Pollyanna-ish.

Well, nothing could be further from the truth.

When I got home from my meetings on Friday, I turned on the TV to see the horrifying news from Paris.

Yes, dreadful events happen in the real world. As investors, we all know that.

We also know that it doesn't necessarily require bloodshed to send markets lower. Most of the time, market panic ensues for reasons entirely unrelated to anybody's physical harm. It's the result of market sentiment as it pertains to an economic forecast, or an expectation about fiscal or monetary policy.

I'm not sitting here whistling an endless chorus of "Don't Worry, Be Happy." Actually, I encourage a balanced, diversified portfolio -- and avoidance of predictions -- precisely because bad things happen. Asset classes go down the drain.

But accurately predicting what will tank and when is notoriously difficult, to the point of being impossible on a consistent basis. Sure, everybody has some correct guesses about the direction of a stock, sector or even an entire market. A lot of self-congratulation generally accompanies that. You don't hear so much about people's wrong predictions.

Far from reflecting sunny optimism, the practice of eschewing crystal ball gazing is rooted in self-protection. Bad things happen. Protect your portfolio by investing widely, not betting on any particular area of the market, and not selling out because the folks on Twitter think it's a good idea.

For years now, there's been a segment of the investing public who believes some kind of utter collapse is imminent. Maybe. I don't know. But in everything? Global markets, equity, fixed income and real estate, would all fall to zero at once? If that happens, we have bigger problems than any of us can even comprehend. That stack of cash in your money market account would also be at serious risk, as would, I'm sure, the gold bars under the mattress.

Yes, there are big problems. The Islamic State. Income inequality. Young people saddled with college debt. I'm well aware.

I have no idea how these will work out. I do know that every generation faces serious problems, and somehow, people muddle through. There's no utopia, but that's all the more reason why we need to be smart about how we protect ourselves and our families.

But shuffling your money around because of other people's predictions is a proven way to miss out on global investing opportunities.

So go ahead and be nervous about the state of the world and the nation. But let your portfolio reflect that nervousness through full diversification, not panicked trading.