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 12:16PM
No significant cuts in spending will come from this deal, just more money for Washington spenders to squander. Investors are pouring money into stocks and we have another crisis to deal with, giving the spenders even more money by letting them borrow even more. We just gave them more spending money and we cheer, and we will give them the OK to run up more debt and we will cheer again. What's wrong with this picture?
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 12:19PM
So nothing was done about spending?!?!?  I just saw on TV that this bill passed yesterday actually adds $4 trillion more to the deficit.  This is CBO numbers.  I assume that's over 10 years but not sure.

So why would anyone celebrate such a bill?

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 11:18AM

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 ????

Jan 2, 2013 12:15PM

what do we do when and if we run out of paper.

Jan 2, 2013 12:00PM
Who didn't know the market would be up today?   LOL
Jan 2, 2013 12:26PM
So once again not one sickening thing has changed, and there'll be more trillion dollar annual debts, more market and commodity manipulation, more money printing, and more corruption. Just what the stock market wanted.
Jan 2, 2013 12:32PM
I have watched Mr. Cramer on and off since the internet stock bubble. I love how now he and Mr. Blodget have become quasi liberals now since they live in the beltway.  Why on earth would you listen to anyone who screams buy buy buy or sell sell sell on their investment entertainment show.  Mr. Cramer should play some of those clips back in 1999 when the sky was the limit and little investors got sucked in.  What happens in 60 days when the debt limit comes??? Is mr cramer going to ignore that as he famously insisted this morning??? And when we have a 300 point plus drop or more in one day will he be telling you to ignore washington, ignore our debt, ignore our deficit then???? 
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 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 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 12:40PM

And this morning when anohter commentator asked what about the fed being the biggest buyer of our debt by prining money, Mr. cramer smugly said "Go buy some gold".  These pundits who are legends in their own minds are really something.  They remind me of people who laughed at me in 2006 when I said you had to be a dummy to buy a house especially in places like Florida or Phoenix. We cant default on our debt. The only thing the U.S can do is keep doing what it has been doing and that is printing money to buy bonds to try and keep interest rates at zero. But even the fed has warned that will be coming to an end in 2014.  A one percent increase in interest rates will eat up the entire obama tax increase. How come people like Mr. Cramer dont talk about that??? But in five years or so Mr. Cramer will have forgotten his smugness just like he cant remember his smugness during the internet boom when he was telling you to buy companies like Yahoo in the hundreds pers share.

Jan 2, 2013 11:49AM

FIRST OFF.....You have to have a plan.....Then if it all goes to shidt...You have to have another plan.

Let's call that Plan"B".....If that falls into the proverbial manure pile....Try Plan "C"...


If you have went this far, you probably don't need anoher Plan, because you are pretty much done OR


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

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

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 1:48PM

Funny thing....Jim gets paid to do this...We don't.


And a lot of my picks and good standbys....Have went up 3-5% today....wooohoooo !

Now I have to wait for some dips and more divs to come in...?

Give me Money..

Jan 2, 2013 4:36PM

If there were cuts in spending everyone would cry foul !!!!!   Look at the Agricultural farm program .... where does it gain priority to be looked at above all else ? I'm a farmer and quit honestly I could have done a much better job being diverse in my farming operation without any farm program or intervention by the government. Without a farm program there might be farmers go belly up. But I assure everyone there are many others out there who can and are willing to take their places in farming !!! What happened to supply and demand ?

Jan 2, 2013 10:40AM
The NASDAQ......is just going nuts...
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