What Wildland Firefighting Teaches About Investing

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Includes: DIA, QQQ, SPY
by: Roger Nusbaum

Summary

Just as it is important to refresh on wildland firefighting, it is also important to refresh on investing, more specifically, your chosen investment approach.

There will be investors who do not take the time to learn how income investing will evolve; invariably, these folks will get torched.

You have to be willing to be contrarian and underperform for periods of time -- sometimes years.

By Roger Nusbaum AdvisorShares ETF Strategist

Every spring is very busy here in the Prescott area with various training opportunities related to the wildfire season. The Arizona Wildfire Academy occurs in early March, then later in March is the Prescott Basin Operations Drill (a huge annual inter-agency drill) which occurred Friday, and then this past Saturday, our department had its annual Wildland Refresher known as RT-130.

You can Google the term RT-130 to learn more about it, but essentially, we review what are known as the standard fire orders and watch-out situations, we practice how to deploy a fire shelter, then we go over a couple points of emphasis from one of the websites you'll find if you Google RT-130 (this year was the dangers of smoke and the propensity for fires to be most likely to blow up between 1400 and 1630).

Just as it is important to refresh on wildland firefighting, it is also important to refresh on investing, more specifically, your chosen investment approach. And just as it is important for what we know about fighting fire aggressively to evolve as we learn more (the increased danger between 1400 and 1630 is new information for our department), so too must what we know about investing and markets evolve as well as our engagement with markets.

One quote that popped up during all of this training that is directly applicable to investing was "before you can think outside the box, you need to understand what is inside the box."

We've written before about fixed income investing possibly becoming more complex if/when interest rates normalize. Most investors know what is inside the box in terms of laddering, mixing credit quality and the inverse relationship between prices and yields. What might be outside the box, or the equivalent of fighting a wildfire between 1400 and 1630, is managing an income portfolio during a prolonged period of rising rates.

Where a simple treasury ladder was sufficient for a successful outcome for many years, that simply will not cut it any longer; the US Treasury has admitted as much when it recently began issuing floating rate debt.

There will be investors who do not take the time to learn how income investing will evolve; invariably, these folks will get torched owning closed-end funds thinking that because they are collecting 7%, a price drop won't matter, but of course funds don't have to come back from a large decline, and there are no guarantees that today's payouts will remain the same.

I write about this frequently, because I believe it is important, and because many investors stand to get hurt if rates ever rise meaningfully.

In a similar vein, equity investing might be facing a less dramatic shift. After years where foreign investing outperformed, the pendulum swung back to domestic for the last couple of years, but over the last three weeks, foreign, especially emerging, has dramatically outperformed domestic.

Three weeks is obviously not meaningful (this is the start of a shift or it isn't), but part of an investment refresher is to tie back into the idea that nothing can outperform for all times. If now is not the start of a shift into foreign, then it will come later.

There was an interesting quote in Barron's this week that relates from Chris Brightman of Research Affiliates who said:

You have to be willing to be contrarian and underperform for periods of time -- sometimes years.

That applies to more than contrarian investing -- it applies to all investment strategies. Value investing comes and goes out of favor as do various forms of rules-based investing and any other form of investing, but something like GARP (for example) which is valid even if not your preferred method, can still get the job done in the context of a long-term investment strategy.

Part of long-term success means not becoming impatient during one of the periods where your preferred strategy happens to lag.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contain within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com. AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.