I have 3 general rules when it comes to investing , I follow these guide lines as I follow my breath. The reason I say that is because you never double guess your breath but you’re certain you breath. That is how disciplined you need to be when building and growing your investment portfolios. When it comes to investing you must remain consistent within your strategy rules , or else you through the end goal out of whack.
RULE 1: EAT WHEN FOOD IS ON TBE TABLE!
What I mean by this is when opportunity presents itself NEVER hesitate.. That double thought of whether you should or you shouldn’t pull the trigger on a asset at a certain valuation is the moment you may have just missed that could have brought you amazing returns. I’m speaking from experience , being an investor for 20+ years one thing I realized is that when I see a good buy and I double guess it I always miss my shot! Not only with me this is a common theme amongst many people within this space. The greatest saying for this is “when opportunity meets preparation , that is the recipe for success.†But in order to do this that means you must be liquid. What do I mean by that? Is that you’re going to need buying power on hand , meaning cash readily available so you can make a purchase. I know myself and many others say cash is trash , which it is. But you need it in order to swap it and acquire something that isn’t trash! You never know when the market is going to present you an amazing opportunity, and if all your cash is tide up then how can you possibly benefit from the opportunities that present themselves? Example no one really expected the market to dump in March and become completely oversold which gave investors an amazing chance to gain upwards of 40-50% gains. So have liquidity on hand ready to buy is extremely important , it’s something I like to call “opportunity money.â€
RULE 2: BE CERTAIN FOR UNCERTAINTY.
This rule you can be certain about , even when the markets are everything but certain. After a shocking recovery in 2019, many investors began 2020 with high optimistic expectations . No one was expecting a once in a century global pandemic that would take markets and economies to their knees.
Now, it is very common in the investment industry to model investment returns using a normal distribution curve, which is based upon expected returns and expected risk.
Here I have a probability density function (PDF) which is a statistical expression that defines a probability distribution (the likelihood of an outcome) for a discrete random variable (e.g., a stock or ETF) as opposed to a continuous random variable.
For the most part is looks normal…But if we look to the left of the distribution, we can see the famous “fat tails”. Those fat tails tell us that extreme events occur more frequently in reality than what a normal distribution would predict. Which goes to show it’s more likely to have things that aren’t likely to happen. So being ready with liquidity on hand from the first rule we went over , alongside preparations for unexpected events go hand in hand for my investment guidelines.
RULE 3: INVEST YOUR MONEY NOT YOUR EMOTIONS.
Time after time investors do not take a position due to their emotions , or they get shaken out of their positions due to their emotions. If we just look back a few months we had one of the worst market sell offs from the COVID pandemic. The unemotional data screamed to go long , meanwhile our emotions scared us anyway from taking action… which also goes back to rule 1 of taking action when presented opportunities. It’s unfortunate that our human behavior tends to steer us away from taking those risks that can potentially change our whole financial circumstances. The only way to keep our emotions out of our investments is by looking at things through a very stoic approach. If you haven’t dipped into the world of philosophy there is one that may be worth checking out that will aid you in acting rationally rather then irrationally through emotions. It’ll teach you how to teaspoons rather than react. This practice is called stoicism, this can be applied to the investment world. Emotions all have their time and place but when it comes to investing they only tend to hinder us rather then promote us in terms of trading behaviors.