You Shouldn’t Have to Make Too Many $$ Decisions

My approach to money has shifted over the years.

I used to make most of my investment decisions as circumstances arose – in the moment.

“Given the current market environment, I should sell this stock.”

“Maybe I should dollar-cost average since the stock has dropped 10%.”

“It’s probably time to take profits while things are good.”

But after a while, I became frustrated and discouraged by the results… not only with the investment returns, but with the level of stress I was experiencing.

I’ve also been observing investor behavior at The Oxford Club for 17 years, and I’ve seen a consistent pattern. Investors who make rash investment decisions subjectively perform worse.

They carry more stress about money. Market news and politics affect their lives much more.

And it’s why historically, the “average investor” return is just 2.5%, underperforming most averages.

Just look at the banking situation that started last week and has spilled over into this week.

Silicon Valley Bank was headline news. Prominent investors like Bill Ackman called on the federal government to protect depositors. Twitter was ablaze. Prominent venture capitalists were warning of the bank’s failure.

But then on Monday, stocks jumped. On Tuesday, favorable inflation data came in, and the markets surged higher.

Most investors following the headlines were not expecting this.

We see it happen all the time with consumer price index (CPI) reports, as well as with jobs numbers and Fed rate decisions.

All of it matters. But none of it should dramatically change how you manage your portfolio.

Short-term news shouldn’t factor into your decisions regarding your long-term portfolio. Even your short-term trading decisions should be guided by tested investment principles.

Indeed, following a philosophy and adhering to principles is the cure.

Pulse Check

These days, I adhere to principles with every decision I make… which is to say I have predetermined the decision based on certain criteria.

I use stop losses for every position. If a company drops below the stop loss, it is automatically sold. These stop losses – not market fluctuations – determine my exits. And unless a particular company is under fire, headlines don’t play a role either.

I put the same amount into every trade. This doesn’t change, and I don’t think about it when I buy a stock.

I also always reinvest dividends. When stocks go down, I can buy more shares with the dividends I reinvest. This accelerates the compounding effect in my portfolio.

I apply certain guidelines to trading, too. When I trade, I follow hard and fast rules regardless of what strategy I’m using.

When you use principles to galvanize your investing approach, everything is less complicated.

Your stress about investing goes down. The decisions you make feel easier.

And… you’ll avoid the trap of the “average investor.” By using a principled approach, you’ll be ahead of 95% of investors.

And your returns will tell the story.

Be relentless,

Nathan

P.S. How often do you use principles to guide your decisions? Shoot me a note and let me know. I’d love to hear from you.