[It took me several weeks to finish this post. Even if I follow financial markets since decades, it is difficult to remind myself that circumstances can turn on a dime. I envision people that were cheering for Tesla or Bitcoin just days ago are now in the ‘never invest my money again’ mood. So, if it feels strange to you to read about sexy investment ideas, remind yourself what you were googling back in January. I hope this post will turn actual again very soon.]
While achieving financial security may not be the most exciting thing in the world, it sure feels good…for you. But saving money is not sexy, you cannot post Instagram pictures of the latte you did not buy, neither write “wait for it” when your audience has to actually wait 30 or 40 years to see the real benefit of your spending choices. The same works for investments, the more boring the better.
Boring rules to investment success
Invest on a regular basis: dollar-cost-averaging works, here a good explanation why. It removes the greatest part of the stress and makes the process more rule and less sentiment based.
Always have a loser in your portfolio: if everything is going up, it means your diversification is not working. Diversification won’t eliminate volatility in your investment portfolio, but it basically eliminates the possibility that your money will go to zero.
Rebalance automatically: typically, this is done once a year but if you are interested on the art of it, I suggest you to start from here.
Leave your portfolio alone: before starting to invest, you should prepare your Strategic Asset Allocation based on your financial situation, your current and future needs and your risk appetite. By SAA I mean the % of equity, bond, commodities, real estate, bitcoin, p2p, and so on asset classes you want to have in your portfolio. If this exercise is done properly, you will not feel the urge (too much) of going and revisiting your weights when stocks are going up or down. If in the last two weeks you panicked, it means your initial assessment of your risk appetite was wrong and once markets are stable again, you should reduce your high risk investments.
Bored man gets paid , Stephen Nelson writes here.
It is difficult to be patient, to wait years until your investments bring you the desired result: you want to be validated (and rich) now! One of the big question in quant-finance right now is if the value factor is still generating an over-performance. Being able to go through a decade of under-performance is the reason why the value factor has not to be arbitraged away, are you able to grind this challenge?
Price is what you pay, value is what you get. Lot of friends regularly enquire me about this or that stock, usually after a big news or an IPO: the issue is that a great company is not always a great investment, what you pay is as important as what you buy. Tesla may make great cars but if you buy shares at price that imply a valuation greater than the whole auto sector, lot of things have to go your way for your investment to be successful.
This article is another great example of why boring investments work. Boring investments attract less competition: what are the odds of you being the centre of the conversation at a party if your main occupation is to fill tax papers for others? Not great? Less competition means easier access or bigger margins; the sweet spot is when you find something that is interesting for you but everyone else consider boring: in this case you do not endure any pain but enjoy all the benefits.
Several studies demonstrates how, over time, firms that return excess capital to the shareholders in the form of cash dividends and buybacks soundly trounce those that pour every excess dime back into core operations to fund growth. Investors often fail to notice because they are looking for “action” in the form of a rapidly rising share price, forgetting that the total growth of the investment must include cash paid out to the owners along the way. This seems to be the reason why the low volatility factor outperforms: the average single stock investor looks for “lottery tickets”, stocks that may explode in price, making growth and those same stocks more expensive. What is important here is the returned capital to investor, not the way that capital is returned: in recent years, companies started to prefer buybacks to dividends (for various reasons, they are more tax efficient, less ‘signalling’ commitment for the future, more flexible) but dividend obsessed investors, quite common in the F.I.R.E. crowd, completely missed the memo and failed to adapt their investment strategy. Screening for only high dividend payers and not total shareholder value distributors puts those investors in a very un-optimal position, to say the least.
A final note to dividend investors in bear markets. If your stock got crushed but you tell yourself I do not care about the price, I came here for the dividend, remember that dividends may, and in the majority of cases will, be cut if there is a recession. Dividends are not bond coupons. As for any other long term strategy, it works because you need to stick to it for (long?) pain periods: no free lunch.
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