Most of us do not feel comfortable without constantly checking the latest state of our investments. In this article I will talk about ways to sleep comfortably at night without worrying about our investments. Following these 4 magical rules will make your investments pain free.
I’m sure many of us are constantly preoccupied, especially when we make risky investments. We cannot stop ourselves from checking the latest state of our investments at every waking moment. In fact, our investments leave us sleepless at night.
If your investments leave you sleepless at night, keep reading, don’t worry about your money.
1- Discard the best-case scenario before you decide
First, decide to invest by considering the possible worst-case scenario, not the best-case scenario. Don’t ignore the possibility that you could be wrong.
Before making an investment decision, be sure to ask yourself the following question;
“After making these investments, when there are developments contrary to my expectations, how much will I lose from these investments?”
When markets turn upside down, that is, in the worst-case scenario, the amount of savings you stand to lose is your RISK. Contrary to popular belief, the risk measure you should look at is not the fluctuations in price during the day or the frequency and extent of these fluctuations.
Now that we know what does not constitute risk , let’s close our market screens.
We all have a certain risk-taking capacity. . When we consider the best-case scenario when making our investments, we are probably making the wrong decision. This is because investment decisions made according to the best-case scenario increase the likelihood of risk taking beyond our capacity. Therefore, the damage we will incur will increase by this proportion.
For example, let’s buy stocks, cryptocurrencies, gold, ETFs, or options. When the markets move very fast in an upward or downward direction, the fluctuations in the price of whatever we buy can be very severe.
When there are very strong movements in the opposite direction of the positions that we have taken in the markets, we should be careful not to squander our savings. In fact, this is what we call risk control.
Risk is the possibility of a permanent loss of our savings. If we define risk in this way, our investments will be less painful when we make our decisions in a manner that ensures that we keep this probability at a minimum.
2- When we try a dish for the first time, our first bite is simply to taste
If we decide to try a meal we have never eaten before, we take a small bite for the sake of tasting. If we like what we have tried, we will fill our plates.
Likewise, when determining the portfolio weight of an instrument that you will invest in for the first time, it is very important that you know something about that area.
Even if you know what it is that you are eating, never bite off more than you can chew.
What do I mean?
The weight of any investment you make in your total portfolio should not exceed 15%. If you stand to incur a large loss under a bad scenario, , the portfolio weight should be at most 5%.
If you know the instrument you invest in very well, trust your investmentand believe that the return will be high. This rate may be close to 15%.
However, if you have insufficient knowledge about the instrument you invest in and are not sure about the return of your investment, you should keep the portfolio weight low.
In fact, if you are investing in a very risky area, that is, if it is something you do not know anything about, then you should definitely not exceed 5%.
Because when the price drops to zero in the instrument you invest in, you should not let the damage you encounter upset you.
3-Purchase quality cheaply
It is always more profitable to buy a quality product at its fair value than to buy a poor quality product at a very cheap price. Purchase quality cheaply.
I guess it goes without saying that the company you decide to invest in must be of high quality. Even if you buy something of poor quality at a low price, it may be more likely than ever that its price will plummet. .
The lower the price you buy a quality asset you want to invest in, the more peace of mind you will have. Because the lower price the lower the probability of loss.
For example, if your phone falls from a height of one meter, it might still be working with a few scratches and breaks. However, if it falls from a height of ten meters, you probably won’t be able to use that phone again.
So, the lower the price of the asset you invest in, the less likely the price will fall further.
4-Adopt a long-term perspective
Let’s say you made your investment decision keeping in mind what you will lose in the worst-case scenario. You decided the portfolio weights according to the probability of loss. You invested in quality investments at attractive prices. After investing, you did not mind daily price fluctuations.
Implementing the magical rules is certainly easier said than done unless you have a long-term perspective. If you want to become one of the few successful investors who apply them and increase their savings much more confidently as a first step, you should prepare your long-term financial planning byknowing yourself and finding out what kind of investor you are.
To do this, fill out the Investment Profile Questionnaire now and start preparing your financial planning.
Emin Zumrut, CFA, is the Founding Partner of Emerald Value Partners. He provides consultancy for individuals and families on long-term financial planning and helps them make smart investment decisions.