Bad Reasons for Changing Your Investments
There are two really, really bad reasons for changing your investments. They are: (a) panic, and (b) greed.
The most common is panic.
Investors, even otherwise intelligent ones, are very prone to panic. It happens like this: say you have $300,000 in an index fund. Something like the Great Recession occurs and your fund loses . . . oh, I don’t know, let’s say a third of its value. Now you’re down to $200,000. Things are looking grim. Everyone else is panicking, selling everything they own, running around screaming, waving their arms about and putting their underwear on their heads. What are you going to do?
If you answered ‘nothing’, congratulations. That is the correct answer. Sit on your bottom and enjoy the chaos as you might a fireworks show or the demolition of an old apartment block. Wait long enough (perhaps some years) and the value of your fund will eventually be back where it was, and soon after that it will hopefully start growing again. You would actually lose nothing, like Thad in our earlier example.
If, on the other hand, you panic and sell like everyone else, and put whatever wealth you have left into a good, solid bank account, where does that leave you? Well, that leaves you $100,000 out of pocket.
Don’t change your investments because of panic. If you have some spare cash lying around, consider doing the opposite of what everyone else is doing: stay deathly calm and actually buy shares. Don’t try to time the market by saving up for a crash, but if shares are cheap and you happen to have the money at hand, why not?
Reversal: if your investment has suddenly fallen in value even though you thought that it was a safe, defensive investment, that might be a good reason for getting out. If shares fall, you ought to expect that and not worry about it. If your bank is not paying back your term deposit/CD in full, that is a problem. If you feel that you have been misled or mistaken about how risky a product is, it may be worth your while to get out of there quick even though you must realize a loss to do so. It might be a case of cutting your losses. I am reminded here again of those Australian farmers who were tricked into highly volatile investments: they probably should have gotten straight out as soon as they realized how risky it was, instead of believing their advisors that everything was going to be fine and then losing the lot.
The second bad reason for changing your investments is the opposite of panic: greed, and the euphoria that goes with it. If the market is going gangbusters, people are making money hand over fist, and all the financial news people are saying, ‘The good times will never end!’ you will be tempted to take out that 20% or whatever it was in defensive investments like bonds and put it all into the stock market.
The problem with this is, just because the market has been going well doesn’t mean it will continue to do so. Some people actually see this euphoria as a sign of trouble and start to go defensive. I would not recommend this as it is timing the market, which, as we discussed at length, does not work.
Plod along, make your regular investments as usual, rebalance according to your plan yearly, and you’ll do better in the long run than you would by trying to chase the rainbow of past performance.
For that matter, don’t succumb to peer pressure. If all your buddies are buying bitcoin and making a mint, that does not mean that you should do the same. Reread the section above on crypto, decide what part it should play in your overall strategy, and stick to that plan.
That phrase keeps coming up: stick to the plan. This is what should always do when it comes to investments, unless one of those good reasons for changing comes up.
A further note on greed: be very wary of anyone who claims they can get you returns way above what’s presently feasible via the assets described in this book. If it’s some kind of hedge fund or weird investment with a purported, very high return, it must be risky. This is a law of nature. If they claim to have inside information about some asset that’s about to go gangbusters, either (a) this is insider trading, which is illegal, or (b) it’s a fib.
This book has clearly outlined what kind of returns are feasible in the long run. The main reason that people manage to lose everything is that they try for more, fly too close to the sun, and plummet back to Earth.
Don’t be greedy.
You might occasionally change your investments but this should be annual rebalancing or in response to specific, personal circumstances. If you’re doing any more than minor adjustments every year then you’re fiddling. Stop it, or you will go blind!
Do not change your investments out of panic or greed. Stick to the plan. Patience is the final key to achieving financial freedom.
Also available on many other platforms.