Many people assume successful investing comes from picking winners.
The way you win is by producing alpha and outsmarting the market.
There is an infinitesimal percentage of the population that can do this consistently over the long haul.
For the rest of us, success looks more like survival. Those investors who can survive their own mistakes, avoid blowing themselves up and generally stick to a reasonable investment process have a higher probability of success in the markets.
Survival is even more important during down markets.
In down markets, investors start pressing, doing more, trying to time the market and opening themselves up to avoidable risks.
Everyone has their own strategy when markets are in a freefall.
Here’s my playbook for surviving a bear market:
I try to be healthy. Eat right. Exercise. Get enough sleep at night.
This stuff might not feel important but it helps.
Jason Zweig taught me in Your Money & Your Brain that losses and gains can have profound physical effects on both the body and the brain. Financial losses are processed in the same area of the brain that responds to mortal danger.
Studies show we can actually relive our financial losses in our sleep.
Losing money is painful. It can be worse if you don’t have a healthy lifestyle.
I turn off my brain for a while. “Ignoring the noise” is financial advice that sounds intelligent but is easier said than done in the information age.
I pay close attention to the markets because I find it interesting and it’s my job but it’s unhealthy to follow this stuff 24/7.
Your brain needs rest just like the rest of your body.
I turn it off by watching a little TV every night, watching movies and reading fiction. I like to spend a lot of time outside too.
You don’t have to be learning or hustling all the time.
I live my life. The internet has made it more acceptable to exhibit cult-like behavior.
Everyone is trying to find their own tribe now.
This has even spilled over into investments.
You have people who are diehards for certain stocks, CEOs, funds or portfolio managers. It’s one thing to have conviction in your investments but many people take this to unhealthy extremes these days.
It can be poisonous to allow your investments to consume you.
Your life is not defined by your portfolio or the securities you own. Net worth is a poor definition of success in life.
Instead of staring at a screen all day trying to will your investments to start going up again, go out to drinks with friends. Take a walk. Go to a movie. Bring your kids to the playground.
The market won’t notice if you aren’t paying attention to it all the time.
I try to avoid taking the market personally. It’s easy to internalize market moves and take them personally but it can be a recipe for disaster.
We all feel like geniuses when markets are rising and idiots when they’re falling but the truth is always somewhere in the middle.
Yes, plenty of investors make wonderful investments or big mistakes but the market doesn’t care about your feelings.
There was once a study performed at a horse racing track where they asked the bettors how confident they were in their picks, both before and after the bets were placed. People were much more confident in their horse after the bet was placed than beforehand. Once you have skin in the game it changes your relationship with your investments.
This is why we feel more comfortable taking risks when things are rising than when they’re falling.
I’ve learned to care a lot less about what the market does in the short-term because the market doesn’t care about me.
It’s a one-sided relationship.
I avoid the dream of perfection. When markets fall many investors feel like they need to grab the steering wheel to take control of their portfolio.
How should I hedge?
What’s the right allocation for the current environment?
How do I nail the bottom?
The problem is trying harder does not guarantee better results. Doing more offers the illusion of control but often hurts performance more than it helps, especially when emotions are running high.
Plus, it will always feel like it’s too early to buy and too late to sell during a bear market.
I expect bear markets to happen. I know my risk profile, time horizon and liquidity needs. I have an investment plan in place.
Other than that, what happens with tops and bottoms or bulls and bears is out of my control.
Michael and I discussed our strategies for dealing with a bear market on this week’s Animal Spirits video:
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