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Moving from a Job Mentality to a Savings Mentality to a Investment Mentality
There is a rich man's mentality where they view the use of and making money very different than the poor and middle class. I also believe there is a investor mentality that is very important to master. When the stock market recently dropped (I think it was over 1000 points) the drop was because people were panicking and selling and many lost money because they panicked. The same thing happened in 08. With the recent drop I stayed invested but had it been a year ago I may have panicked. I'm still evolving into mastering the investment mentality. I know you should buy into solid companies but what are your thoughts about
Letting winners run?
Ignoring the hype?
Ignoring the doomsayers,
Buying on dips (it's hard to buy on dips),
Mastering emotions when you see a big drop in value,
Other thoughts?
When the stock market recently dropped (I think it was over 1000 points) the drop was because people were panicking and selling and many lost money because they panicked.
I disagree with your premise. The big drop was due to algorithmic trading. Algorithms do not panic. Much of the selling was due to a type of fund called a "risk parity" fund. Risk Parity funds do not allocate $$ against asset class until they reach a desired % of the portfolio in that asset class. Instead, Risk Parity funds allocate $$ against an asset class until the risk of that slice of the portfolio matches the risk of other slices of the portfolio. The canonical 60/40 portfolio, it turns out, concentrates over 90% of its risk in the equity slice. A risk parity portfolio allocates $$ against the asset classes until the risk is the same in each slice - which means a much smaller equity slice to the portfolio. The risk parity algorithms triggered the huge sell off in an attempt to keep the equity slice at a tolerable risk percentage of the whole.
Quote:
Originally Posted by petch751
...Mastering emotions when you see a big drop in value,
Other thoughts?
"you only get hurt on a roller coaster if you jump off while its moving."
Seriously, though -- you never master your emotions. Instead, you have a written policy that you create when you are not emotional. Then, you follow that written policy even when you are emotional. The key is to have a well-thought through and carefully crafted & written policy statement to follow.
I disagree with your premise. The big drop was due to algorithmic trading. Algorithms do not panic. Much of the selling was due to a type of fund called a "risk parity" fund. Risk Parity funds do not allocate $$ against asset class until they reach a desired % of the portfolio in that asset class. Instead, Risk Parity funds allocate $$ against an asset class until the risk of that slice of the portfolio matches the risk of other slices of the portfolio. The canonical 60/40 portfolio, it turns out, concentrates over 90% of its risk in the equity slice. A risk parity portfolio allocates $$ against the asset classes until the risk is the same in each slice - which means a much smaller equity slice to the portfolio. The risk parity algorithms triggered the huge sell off in an attempt to keep the equity slice at a tolerable risk percentage of the whole.
Ok to the first part of your response, my thinking was to simplified obviously.
Quote:
Originally Posted by SportyandMisty
"you only get hurt on a roller coaster if you jump off while its moving."
Seriously, though -- you never master your emotions. Instead, you have a written policy that you create when you are not emotional. Then, you follow that written policy even when you are emotional. The key is to have a well-thought through and carefully crafted & written policy statement to follow.
LOL SportyandMisty, now that's one phrase I'll remember if I'm in the panic phase, a helpful visual. A written policy is also a good idea. It makes sense, like at my company, policies so people know how to handle situations and when someone would challenge me about a policy .... "My policies are to protect me from my own good nature".
Moving from a Job Mentality to a Savings Mentality to a Investment Mentality
There is a rich man's mentality where they view the use of and making money very different than the poor and middle class. I also believe there is a investor mentality that is very important to master. When the stock market recently dropped (I think it was over 1000 points) the drop was because people were panicking and selling and many lost money because they panicked. The same thing happened in 08. With the recent drop I stayed invested but had it been a year ago I may have panicked. I'm still evolving into mastering the investment mentality. I know you should buy into solid companies but what are your thoughts about
Letting winners run?
Ignoring the hype?
Ignoring the doomsayers,
Buying on dips (it's hard to buy on dips),
Mastering emotions when you see a big drop in value,
Other thoughts?
Oh no, not another: "Market always goes up. Don't worry. Just hold on to your stocks forever and you will be rich." thinking. OK, you didn't say rich. I embellished a little bit.
I don't blame you for thinking that way. It's not your fault. Just know that the DOW has an uptrend bias and does not represent the market.
Why does the market crash? I will answer in plain English so you won't have to pretend to understand. It goes down because there are significantly more sellers than buyers. See, pretty simple, huh? "Duh, don't you think I already know that?", you say. Alright, you've got me.
Seriously, the best way to make money in the market is to get stocks for free. Start a company, take it public, and boom you are a billionaire. Think I am kidding? Bill Gates, Michael Dell, etc. have done it this way.
This is where I think having a portion (note I did not say all) of one's investments in a passive type investment portfolio might be a useful strategy. Let's say you allocate 1/3 to 1/2 of your portfolio as it stands today into 2 or 3 well-known and well-balanced index or ETF funds know for low expenses, and then let it ride. Do not track it but a couple times a year. Do not sell when the market goes down...just ignore it and let it go/grow over the next decade or 2 or 3. With a long time horizon your passive investment portfolio should be able to withstand market corrections without issue.
Then, with the rest of your portfolio, do whatever else you want in terms of investing, be that sectors or some individual stocks or a mixture of various funds to take more risk or add additional diversification.
This is a function of confidence in you trading system and the discipline to actually follow it. This is hard to do if you don't have a system so if you don't have one that is step one.
Ignoring the hype?
Ignoring the doomsayers,
Buying on dips (it's hard to buy on dips),
This goes back to having confidence in your system, but it also has to do with your understanding of the markets. If you really know how the markets work, as in why they go up and down, you'll be able to see through the hype, laugh at the doomsayers expense, and recognize dips from trend changes. This partially comes through experience, but it primarily has to do with your background in macroeconomics imo. Getting to the point of where your really understand the markets takes a long time and its not easy.
Mastering emotions when you see a big drop in value,
Losing money is a sin, don't let it happen! I don't care if it is realize or unrealized, rule #1 is not to lose money.
rule #2 is do not fall for the old myth buy low , sell high .
it sounds great until you try to pull it off and realize your are breaking the cardinal rule of investing ; don't fight the trend .
trying to catch a falling knife or guess where low is , never ends well.
folks thought low was when we fell 2000 points in 2008 -2009 only to be off by another 4000 points more it had to fall.
that triggered stop losses and left many running for the exits .
buy high and sell higher has made way more money with far less risk . objects in motion stay in motion until they hit something .
there is far greater chance of not losing money or being down when you do not fight the trend .
as they say the trend is your friend .
the other thing that happens is you try to buy low so you wait and wait , only to have the markets reverse course and leave you behind.
hmmm,... good point... Trending. It sure puts and end to the temptation to buy today.
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