Let this be the death of risk on, risk off

This lazy nonstrategy might as well be called 'buy high, sell low.'

By Jim Cramer Jan 2, 2013 10:06AM

thestreet logoStock market report ULTRAF Digital Vision Getty ImagesYou know what didn't work in 2012? Risk on, risk off. As hard as I tried to stamp out this ridiculous bit of hedge-fund-ese, I was not able to. There are too many commentators out there, and too many traders who want to succumb to this kind of non-rigorous, intellectually lazy thinking, and it's impossible to shut them all down.

But let 2012 be a lesson to you: It was revealed that you would have underperformed these people if you'd followed them. Notice I say "underperformed," because one thing is for certain -- none of these blowhards will let you see their returns after what I bet was a fiasco year for what I can only call an "alleged" strategy.

Why did risk on, risk off lead you astray? Let's count the ways. First and foremost, the S&P 500 ($INX) gained 13.5% last year, or 16% if you include reinvested dividends. One thing we know for sure is that those who played this on/off switch game -- this binary nonsense -- didn't get to reinvest those dividends. Again, these payouts were a hugely important component of the year's performance. Some of these trading machines may not have much of any of these dividends to show for their efforts, let alone reinvested ones, even as companies continued to deliver increasingly higher payouts and even though the tax rate on them was absurdly low. (At this point, let's just call that tax rate "low," as the increase in the new law only takes it to about half of what we were warned it could be.)

Second, the shorthand "risk, no risk" let you down entirely as a daily allocation tactic. Let's take Europe. What was risky? Bonds? Stocks? Bonds were miraculous performers. But stocks were incredible, too. I guess if you flitted from risk-on to risk-off and back again, you sold low and bought high pretty regularly. After all, the biggest amounts of money were made from the riskiest moments -- theoretically what you were supposed to avoid if you were "playing" risk-off. The non-strategy might as well be called "buy high, sell low." Maybe if you do it enough times, it will work?

I don't think so.

Third, risk on, risk off totally backfired as a portfolio sector-management tool. The riskiest stocks were the least risky -- the utilities and the lower-yielding healthcare names. So you would have been hurt even by the term "risk" as a rubric. Secondarily, bonds as a risk-off strategy seems contradictory. Bond funds began to take it on the chin late in the year even as the environment got riskier and riskier, thanks to the fiscal cliff and its attendant spending slowdown by more cautious U.S. consumers.

So what's the conclusion of all of this? Simple. I ran money for 30 years before this risk-on, risk-off garbage came in to play. I am beginning to believe it is simply the refuge of those who refuse to do individual stock homework, or who can't think of anything to ask or say.

Let 2013 be the year when people who continue with this terminology get defrocked -- not that they were ever frocked to begin with. I know I will do my best to out them as short-term mental hooligans. Maybe this time, with the sterling performance of the risky S&P, it will become clear that the risk-on/risk-off nonsense is nothing but a travesty perpetrated by those seeking and offering sound bites that were nothing but costly diversions from true investing principles.


cramer's face



Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust.  



More from TheStreet.com

Jan 2, 2013 11:24AM
Ok,help me understand something,this "cliff" deal only held off a N E W problem,it didn't S O L V E  any present problems.Sooooo,whats driving the market and oil up so much ???
Jan 2, 2013 11:18AM

Over a month ago I stated there would be no such thing as going over the " Cliff "  That's only for the media for drama reasons ! Going over the cliff would mean a  depression !  I stated that there would be more watering down of the problems at hand.   Its still continues !!

Investors should be impressed ????


Let's see we are still headed for the biggest financial crash of all time $16.4 trillion debt and growing by about $2 trillion a year into the foreseeable future.


And our real GDP as measured by income is a mere $4 trillion GDP -- pretty much we are 4 times earnings in debt as a country and going down fast.



Jan 2, 2013 11:09AM
Cramer calling other experts blowhards is just too funny ....in fact I believe it was probably his college nickname.....

And mr c ....what are the returns for your AA fund? 
Jan 2, 2013 11:04AM

"because one thing is for certain -- none of these blowhards will let you see their returns after what I bet was a fiasco year for what I can only call an "alleged" strategy"


pot, kettle, repeat daily.

Jan 2, 2013 10:57AM

Well I'll be damned they got a tax deal done, I'd say well done but really it's more thank God they got it done.  A strong up day/week ahead.

Happy New Year!!!!!

Jan 2, 2013 10:48AM
The whole risk on/risk off thing seems weird to me because it completely ignores the merits of individual stocks or even sectors.  "Risk" is only meaningful in regards to analysis of a specific company's strategy, prospects and financials and cannot be generalized in my opinion.
Jan 2, 2013 10:41AM
happy new year Tog and Brutus.  i suspect this will be a notably good year.  based on nothing.  just like a Cramer article
Jan 2, 2013 10:40AM
well, with "too many comentators" why haven't i heard the phrase risk on-risk off?  i monitor this site often, and i only just hear it today? 
Jan 2, 2013 10:40AM
The NASDAQ......is just going nuts...
Jan 2, 2013 10:33AM

Well judging from what Asia and Europe are or have done....200+ points up today on the DOW...

Certainly is not out of the question......Go for 300 maybe...


But they still have a lot of work to do, on "cutting spending."




Jan 2, 2013 10:20AM
Risk-On/Risk-Off kinda reminds me of those old commercials for the Clapper...

"Risk on"
"Risk off"
"Risk on, risk off"
"The Risker"

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