I was reading a post from a local Singaporean investing message board.
For the sake of privacy, I am just going to summarize its contents.
The gist of it was that the author’s portfolio was down > 40%, and he was feeling extremely dejected and depressed worrying that all his money would be lost.
Know what your investing in
I have a lot of sympathy for the investor in question as no one likes to see their portfolio plunge in value dramatically, especially if that is money you need in the immediate future.
You read about it time and time again every time there is a market downturn, or certain “dubious investments” blow-up (I am looking at you cryptocurrencies!).
Its important to always know what you’re investing in, and the variability of returns you can expect year to year.
For example, stocks are volatile… and always have been!
There is nothing particularly weird about 2018 and the abnormally low volatility that we saw in 2017 was what was abnormal.
The average intra-year drops of the MSCI Asia Ex-Japan -20% (median: -17%), and annual returns are positive in 19 of 31 years (61%).
You can look at the variability of returns per calendar year and within the year itself from this helpful chart from JP Morgan.
Leverage is almost always a terrible idea
A long, long time ago a friend said to me about leverage, “If you’re smart you don’t need it. If you’re dumb you got no business using it.” – Warren Buffett
Stocks are volatile… and I’ve always been against using leverage when investing in the stock market.
Investing for the long run and accepting price volatility is one thing.
But once you throw in leverage into the equation, it changes the game altogether and makes you far more jittery and prone to market shocks.
A short term decline can very well lead to a margin call and a permanent loss in unlucky circumstances and should be avoided.
Understand the risks within each asset class and adjust accordingly
If you’re not comfortable dealing with short term price fluctuations… than allocating 100% of your portfolio to stocks is probably going to be a very bad idea.
Each individual person has their own behavioural traits. Some people are by the nature far more aggressive – and others more conservative.
Its important to know your own make-up, and also factor in how much time you actually have in implementing your own investment strategy relative to your goals.
What I think is always a bad idea is to delegate this thinking to someone else altogether and becoming “shocked” during periods of bad performance.
I have seen so many new “financial products” but I’ve always thought they were useless because the biggest challenge confronting investors… are investors themselves!
Knowledge is key and if you are investing in established asset classes there’s plenty of historical history to give you a good idea of what to expect.
Prices can only do three things – go up, down or stay the same.
You shouldn’t be surprised when one of the three things happen.
Avoid “hope” investments
Just to end off, one of the biggest things I saw in 2018 was the rise and collapse of crypto-currencies.
I remember reading a fund fact sheet that was predicting triple digit annual returns going forward based on the performance of the last 12 months earlier in the year.
I call these “hope investments” because they sound too good to be true… and unfortunately they often are.
There’s always going to be a new fad down the road now that the hype around crypto has ended.
I think what will serve investors well is to follow some of Graham’s eternal advice to split their own investing into two components – investment and speculation.
There’s nothing wrong with speculating as long as you know you are speculating… and there is smart speculation and dumb speculation.
Just don’t confuse it with investing and limit that to a small portion of your portfolio to “let it out of your system”.