In defense circles, it’s known as “fighting the last war.” A country shaped by a protracted conventional conflict can be unprepared for guerrilla attacks. A nation used to commanding the high seas is unlikely to muster an effective standing army.

Fighting the last war with your investments is a major tactical blunder. Sticking to a fashionable outlier investment strategy, however comforting it might have been in a crisis, is just asking for unbearable financial pain.

Something like that is happening to investors right now. The Swiss investment house UBS found that people in their early to mid-30s with at least $100,000 to invest keep a staggering 42% of that money in cash.

Comparatively, global money managers are at 5%, according to Bank of America. That’s higher than in recent months but far less than flush young investors.

You can’t blame youth for hoarding cash. Virtually their entire financial life has been a series of gargantuan panics — the housing collapse, the credit crisis, the Great Recession and so on. A flock of black swans seemed to be upon us.

This is quite a change from the experience of their parents. Most retirees alive today lived through the (mostly) economic good times following World War II, a far different environment than their Depression-era forebears saw.

The Baby Boomers witnessed market collapses and recoveries repeatedly and learned one kind of lesson. Their young adult children have seen a big crash happen exactly once — albeit a far deeper and more scary decline — and have drawn quite another conclusion.

Both are dead wrong. Both are fighting the last war.

‘Nobody knows anything’

Here’s the problem with having lots of cash and with being 100% all-in on equities. Nobody, and I mean absolutely nobody, knows what is coming down the pike. Starting in 2009, for instance, the bond firm Pimco began to talk about a “new normal” of slower growth.

The phrase was coined by Bill Gross, co-founder of Pimco and the man behind what was at the time the world’s largest mutual fund, the Pimco Total Return Fund. (Today that title is held by the SPDR S&P 500 exchange-traded fund.)

What are Pimco managers saying now? That we’re headed for a “new destination” of stronger U.S. growth. Translation: We were right for a while, then things changed.

Meanwhile, the former CEO of Pimco, Mohamed El-Erian, is making the rounds on cable TV to talk about what he believes is a new “Great Moderation,” a lengthy period of low interest rates and low volatility. Rising credit will meet rising growth, he warns, leading to renewed risk of a credit collapse.

Yet even El-Erian can’t say when that potential collapse might become reality. Yes, markets could be in for a tumble. We might see a classic “sell in May and go away” pattern. We might even see, at some point, a convincing reversal in what has been a very long bull market.

Yet every time the nodding heads on cable TV sound the alarm for imminent disaster the market sloughs it off and sets a new all-time high. El-Erian is in a position to make supremely educated guesses, but that is all they are — guesses.

As the screenwriter William Goldman famously said of Hollywood, “Nobody knows anything.”

Dashing around

Money managers, particularly those who put their names behind bold predictions in the media, have a lot of incentive to make such calls. It’s their job to be the public faces of large, otherwise anonymous investment houses. And they have reasonable intellectual cover for doing so. Markets change, so strategies should change with them, they contend.

For the serious retirement investor, however, dashing around from strategy to strategy is the worst possible course of action. Like the young people in the UBS poll eventually will realize, extreme concentrations greatly increase the risk of being underinvested as markets rise and overinvested when the eventual setbacks finally do arrive.

The remedy for this investing mistake is to own a balanced portfolio of diversified investments that takes into account your emotional response to loss and the number of years until your retirement. Rebalancing a portfolio is a remarkably powerful way to unemotionally capture gains while keeping exposure to unseen risks at a minimum.

The people running financial interview shows on television really don’t want to hear that much. It’s a bit boring and doesn’t help fill airtime or sell advertising slots. But that is exactly how patient investors build wealth in all markets, year after year.

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