Studies of Life

Learning by doing.

The Markets are Plunging? You Should not Care.

16 October 2014 by Jim

Do you remember the 2008 crisis? Of course you do. Everyone does, because it was scary. The Dow Jones plunged from a previous high of 11200 to 6600 thereby losing 41% of its peak value, and investors were running around like crazed monkeys predicting universal doom. If you panicked and sold your portfolio, your worst outcome would be -41%. That’s bad, of course. But if you kept making decisions, selling and buying stocks in hopes of a reversal, you might have lost much more than that: you might lose 20% on stock A, sell and invest in stock B, lose 20% on stock B, sell and invest in stock C,… you get the idea.

So what could you have done? You could have completely ignored the market, for example. If you had simply kept your portfolio from the beginning of 2008 to today, you would be looking at a profit of +26%. Not that bad. But not great, either. And difficult to do, I must admit.

If you’re currently reading this blog, you’re looking for investment advice or a system to optimise your portfolio, and you’re probably not the kind of person who just invests once and doesn’t look at his portfolio once in 6 years. Everybody tries to be smarter than the market.

The good news is: it’s definitely possible to be smarter than the market. The bad news is: most people don’t have what it takes to properly implement the smart systems they read about. Any system is only as good as the person using it. If you are unable to follow rules, it’s no use to read about fancy rules that allow you to make lots of profit in theory. So don’t just ask yourself what the most profitable investing system is, but also ask yourself what the most feasible is, or the one most suitable for your lifestyle.

For me, the rules are simple. I don’t want my life to revolve around money, so I personally look for low-maintenance investment systems. Some of my rules are:

  • no borrowing money / margin trading: I only invest what I can afford to lose.
  • diversification at all times: no matter how good a single asset class or system works right now, I always diversify my holdings, even if that means I have to buy the current losers. Good uncorrelated asset classes are, for example, stocks, bonds, P2P loans, gold,…
  • no constant portfolio tracking: I only check my portfolio performance once per month, and I reduce the amount of business news I read to a minimum.
  • rebalance at least once per year:

These simple rules help me create peace of mind while investing. And even though they may sound simple, many people do not look at investing like an activity conducive to peace of mind. They’re constantly stressed by the prospects of the big win or the big loss. I take small and steady anytime over that strategy.

If your portfolio is intelligently built and you don’t invest money you don’t have, you should feel comfortable ignoring the news.

If you don’t, then change your attitude and your portfolio. Always diversify. That’s one of the biggest aspects of having peace of mind. And rebalancing at the end of the year effectively makes you benefit from market swings in a simple yet powerful way. You take profits where they are and invest them in the losing asset classes so you sell high and buy low. Exactly like you should. How easy!

Next time the main stock market index loses 10%, 20% or more, rejoice. The recovery will come and you’re prepared, so you can calmly look upon the crazed monkeys and smile.

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