What should you do to avoid investing mistakes?
For me, asset allocation is important. I already know my risk tolerance and what asset allocation percentages I want exposure in each of the markets. I deliberately decide to do nothing with my active investment portfolio during a market downturn. The downturn means an opportunity to buy more cheaper.
If you hold good assets in your portfolio, then you can hold it long term without any fear. You need to take rational decisions and not instant emotional decisions.
Make sure you are not holding off of any decision. The inaction that you commit to, shall be a conscious decision that you want to make. The following are what my experience with the markets
- Swift change in Market conditions – All time highs and lows will come today and go tomorrow before even you sulk in the emotions. Take a look at what happened in March 2020. Markets tanked 25% in the span of a few days. Then, everyone was predicting a doom’s day scenario. But, what happened is the opposite. The market roared back to its all time highs. This can be once in a decade event or just nor the norm. But, it definitely tells us not to be swayed by the short term movements in the market
- Asset Allocation Matters – You need to come up with your own asset allocation strategy that works perfectly for you. Your long term goals in life, risk tolerance capacity or threshold, and time in the market shall determine the asset allocation split. If you a conservative person, make your asset allocation defensive. To have an equal balance, opt for stocks and bonds in equal weight. If you are an aggressive investor, increase the weight of risky assets. Make sure you do your own “stress tests” to make sure you can trust your portfolio to weather any storm
- Time in the market is important during recovery – You need to fully understand that the best gains come immediately after a crash. Katy Perry rightly dubs it, rainbow comes after a hurricane. Look out for those once in a decade opportunities and jump on them readily. If you sold U.S. stocks at the end of 2009 because the market was down for more than a year, you would’ve locked in a 40 percent to 50 percent loss. If you just let your portfolio and stay calm under the storm, the value of your U.S. stock portfolio would have almost completely rebounded in the next 2 years.
Being in a state of increased emotions as a goalkeeper or as an investor will not work to your advantage. Generally, not doing anything when shit hits the fan works. Carefully choose your investments and stick with it with full conviction throughout the journey. I’m not saying never change and ride it down to zero. Just take minimal rational decisions and not instant illogical decisions. Don’t constantly tinker with your portfolio and create investing mistakes that you wouldn’t have done by staying put.