There’s an old saying that people don’t go to church on Sundays to hear the 11th commandment.
They go to reinforce the 10 commandments that are already in place.
The same is true of investment commandments.1
Here are some personal reminders I come back to every time stocks go into a tailspin:
Concentration can be beautiful on the way up but excruciating on the way down. I’ve heard from a lot of investors in recent years looking for my blessing to concentrate their portfolio into tech stocks or crypto or some niche segment of the market.
I personally don’t have the stomach for concentration risk so I diversify.
In doing so, this means I miss out on the opportunity for grand slams when things are going well. That’s not very much fun when the markets are going to the moon.
The other side of this is I also miss out on seeing my entire portfolio down 50-80% when the stock market itself is down 10%.
Risk management only matters when risk rears its ugly head.
Time horizon is all that matters during a correction. This may sound like a humblebrag of sorts but market corrections don’t really bother me all that much anymore. The sight of my holdings falling in price day after day doesn’t bother me for the simple fact that I’ve already resigned myself to this fate.
You see I don’t put money into risk assets that I’m going to need for spending purposes in the next 5 years or so. It’s all long-term capital.
And given this money is going to be invested for the long-term, I already know in advance I’m going to have to endure corrections, bear markets and crashes from time to time.
I know my balance will get vaporized on occasion, I just don’t know when those occasions will be.
The money that I know will be spent in the short-term doesn’t go into risk assets.
An understanding of your time horizon saves you from becoming a forced seller.
It’s best to sell when you want to not when you have to. I’m guessing a lot of the selling in recent days has come from margin calls from investors who bought stocks using leverage. You don’t see massive moves of 10-15% in individual names like we’ve seen without some forced selling.
Buy and hold can be painful when stocks are falling but ‘buy on leverage and get a margin call when your stocks just got killed’ is a far worse fate.
Buy and hold requires you to do both when stocks are falling. It’s much easier to both buy and hold when stuff is going up.
You don’t get huge gains without huge volatility. Many of the assets with the biggest price gains in 2020 are crashing. There are plenty of stocks down 70-80% right now that were retail darlings coming out of the pandemic.
This is what can happen on the other side of outsized gains.
You have to take the bad with the good if you want to play in that sandbox.
Optimization matters less than discipline and personality. The perfect portfolio is worthless if you can’t stick to it when things are going poorly. It’s during a correction that you figure out whether you built a portfolio that suits your personal risk profile, time horizon and personality or someone else’s.
It’s not easy to stay the course if you’re investing in a portfolio that doesn’t fit your willingness, need and ability to take risk.
Every time stocks fall it feels like they’re going to fall even further. It’s always much easier to look back at a long-term chart and kick yourself for not buying when stocks were falling in the past. When you know the exact bottom, investing is easy.
But when you’re living through it these corrections it always feels like they’re only going to get worse.
Stocks fell 10%? Surely 20% is next.
Stocks fell 20%? Well a 30% bear is right around the corner.
Stocks fell 30%? Now it’s an all-out crash. Look out below here comes -40%, -50%, -60% and so on and so forth.
The benefit of having a long time horizon is you don’t need to nail the bottom when buying during a sell-off.
And no one really nails the bottom anyway unless they’re lying or lucky.
If you buy the market, every sell-off in history has been a buying opportunity. I know, I know stocks can always fall further from here. They probably will.
But it’s true that buying when prices are lower has always been a successful strategy if you own the entire market as long as you’re patient.
The reason doesn’t matter. Stocks are selling off right now because of the Fed, inflation, interest rates, geopolitics, speculation gone awry and a whole host of other variables.
It’s intellectually stimulating to work through these reasons if you like talking about the markets (like I do).
But the reasons for the correction doesn’t really matter in the grand scheme of things. Sometimes stocks go down.
You don’t know when and you don’t know why but you know it’s going to happen.
Surviving Your Very First Market Crash
1Credit to me for not titling this blog post “The 10 Commandments of Market Corrections.” That would have been way too easy.