Kass: A Delicate Balance

NEW YORK (Real Money) -- Managing investment money (as distinguished from trading money) is not taking a black or white position; it is working off a complicated mosaic of fundamentals, sentiment/technicals and valuation.

While it currently seems as though a risk-on/risk-off market requires one to be spot-on in our decision-making process over every day/week/month timeframe, it is not the case. No one is that clairvoyant to accurately predict every wiggle. We can occasionally forecast and position a small portion of a portfolio for a short-term move in an attempt to produce a cash-register effect of locking in gains, but, in the main, we should recognize that the odds of succeeding may be remote.

We should aim for more balance and consistency in our portfolios. This means if, in a normal market environment a 60%/40% stock/bond fix is in line with your investment objectives and risk appetite, then a more uncertain investment backdrop (such as we face today) should have a stock/bond guideline of some lesser amount with a cushion of cash -- perhaps 45% stocks, 30% bonds and 25% cash.

Years ago, John Bogle brilliantly said, "We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation." In other words, extreme positions of putting on or putting off risk (in cash or stock) are generally unsound and can produce negative consequences. More balance, even in times of uncertainty, represents a more sound investment strategy.

Getting it right is not being all in or all out.

Thoughtful and hard-hitting analysis that generates exceptional information and knowledge of the historic interaction between companies, industries and asset classes under similar circumstances are some of the basic ingredients for long-term and consistent investment success.

But, as Barton Biggs recently suggested, getting to know yourself will improve your investment behavior and returns:

The investment process is only half the battle. The other weighty component is struggling with yourself and immunizing yourself from the psychological effects of the swings of markets, career risk, the pressure of benchmarks, competition and the loneliness of the long distance runner....