Pick a Valid Investment Strategy, Stick With It

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Pick a Valid Investment Strategy, Stick With It

 Pick a Valid Investment Strategy, Stick With It

Photo Credit: BK

I’m not going to argue for any particular strategy here. My main point is this: every valid investment strategy is going to have some periods of underperformance. Don’t give up on your strategy because of that; you are likely to give up near the point of maximum pain, and miss the great returns in the bull phase of the investment strategy.

Here are three simple bits of advice that I hand out to average people regarding asset allocation:

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  1. Figure out what the maximum loss is that you are willing to take in a year, and then size your allocation to risky assets such that the likelihood of exceeding that loss level is remote.
  2. If you have any doubts on bit of advice #1, reduce the amount of risky assets a bit more. You’d be surprised how little you give up in performance from doing so. The loss from not allocating to risky assets that return better on average is partly mitigated by a bigger payoff from rebalancing from risky assets to safe, and back again.
  3. Use additional money slated for investing to rebalance the portfolio. Feed your losers.

The first rule is most important, because the most important thing here is avoiding panic, leading