"When I talk about having the right mindset, what I'm referring to is resilience - having the ability to withstand the initial shock when catastrophe strikes, and then having the wherewithal to respond in a timely and constructive manner." - Mike Glover, Prepared.
Let's state the obvious, investing in the public markets is HARD. Below we are going to distill some of the most important points that will make you a better investor. These tips will allow you to prosper no matter what the economic environment. Now, let's dig in!!
Diversify Your Risk. Many believe in the idea of diversification, but that term can be deceiving. As risk rises, asset classes correlate, thus returns correlate. Typical “diversification” of asset classes doesn’t work. For example, if you look back at 2022, you’ll notice that fixed income and stocks both had a tumultuous year. A simple 60/40 portfolio allocation (60% stock/ 40% fixed income) didn’t create the type of "diversification" as you would expect. As such, you MUST become a diversifier of risk. If an asset class has increased risk or volatility you must diversify away from that risk. The easiest way to do that is to keep track of the volatility of a certain asset class. For example, the $MOVE index tracks fixed income volatility, $VIX tracks S&P 500 volatility, and $GVZ tracks Gold Volatility. Be tactical and willing to make changes as the environment of risk changes.
Learn Continuously. You must understand market history, behavioral psychology, and math in order to be a successful investor. This will provide a baseline to make good investment decisions. The world of finance is constantly changing, so continuous learning is essential to make informed decisions. A few books to get you on the right track; 1) The (Mis)Behavior of Markets by Mandelbrot; 2) What I Learned Losing A Million Dollars by Moynihan; and 3) Infinite Powers by Steven Strogatz.
Have a Long(er) Term Perspective. Most successful investors have a longer-term perspective and are patient through the full investing cycle. These investors will typically look no more than 3 years out. Tracking investment performance year-to-date will never be the path to investment success. Track your performance on a cycle-to-date basis. A typical investment cycle is simply expressed through a sine curve (shown below). The cycle includes a bull market, a peak, a bear market, and a trough. The successful management of your assets should be based on positive returns through the cycle.
Emotional Discipline. Emotional discipline is crucial in investing. Avoid making decisions based on fear or greed. Emotional investors tend to buy when the market is high due to excitement and sell when it’s low due to fear. Develop a rational and disciplined approach to investing, and stick to your investment plan even during turbulent market conditions. The best way to remove emotion is to have a data-driven process that is repeatable. Most investors jump from headline to headline making subjective decisions based on nothing but emotion. This is a fast track to losing your nest egg. Be disciplined, be rational, have a process, and stick with that process NO MATTER WHAT. This is your money we are talking about here!
Risk Management. We talked about this a bit in point one above, but it’s such an important concept it’s worth making it a point in its own right. Risk management isn’t about your risk tolerance or how much risk you’re willing to take (although it is important). It’s about the risk within your overall portfolio. Most understand that all investments come with risk, but your position sizing is imperative when building a portfolio of investments. For example, historically, the commodities sector has a much higher risk threshold than fixed income. As such, your max position in a commodity position should be MUCH less than your max fixed income position. Additionally, the equities sector has a much higher risk threshold than the currencies sector, thus your max equities position should be less than your max currency position. You should have a minimum and maximum position for every investment that you hold. Below you’ll find a simple chart of minimum and maximum positions based on asset class risk. It’s a great starting point when building a portfolio.
*NOTE: These numbers equate to the percentage of an overall portfolio value.
It goes without saying, but remember, every investor's situation is unique, so it's also a good idea to consult with an investment manager who can provide personalized advice based on your specific circumstances and financial goals. If we can be of any assistance, please let us know. We hope this helps you on your way to investment success, and...HAPPY HALLOWEEN!