Seven golden rules to protect an investment from its owner

Volatility is a concept that is often confused with risk. Volatility refers to how dramatically the price of an investment (or a copy) may change. On the other hand, risk refers to the probability that an investment (or a copy) will underperform the market or result in a permanent loss of capital.

How much volatility can I tolerate?

That's the key question that we all need to answer, but it might be the wrong way to tackle the question of temperament. So the better question would be how can I better tolerate volatility?

Your portfolio (or a copy of someone's else) doesn't need to be protected from volatility. It needs to be protected from yourself. Volatility is a fact of life when you invest in equities or copy others. And the higher the short-term volatility you can deal with, the more impressive long-term returns can be. With this in mind, anyone with a long time horizon should strive for the best performance the market has to offer, and accept volatility as a trade-off. I believe the right way to think about volatility is not to build a system to avoid it, but to build a mental model and a system to embrace it.

Having a clear strategy is probably the most essential aspect of investing, in both bull and bear markets. If you haven't spent the time to think about your goals, time horizon, risk appetite and understanding what you are trying to achieve, you probably need a little bit of soul-searching.

Understanding why you invest is the very first step, one that comes before learning how you want to invest or in what specific opportunities. I hope that many entries in this blog will help you answer these questions.

Here are some rules to implement when looking for a better investment protection over time

Rule # 1 - Invest a fixed amount in any given month.

One of the biggest mistakes novice investors make is that they try their luck at market timing. They think that they can not only anticipate economic trends, but also the corresponding effect on stock prices. Anyone who has been exposed enough to financial literature understands that it's a hazardous hobby, and one that can eat away at your long-term returns very fast.

There are so many reasons why attempting market timing is a poor idea:

• You need to be lucky on both the exit and the re-entry.

• You are competing with institutional investors that use supercomputers and complex data algorithms.

• Your odds of success are very thin with large upswings and downswings usually happening in tandem.

Those who try to time the market to avoid a red year can easily jeopardize their long-term performance simply by being out of the market at the wrong time. Even missing a few good days out of an entire decade can annihilate most of your returns. If you are out of the market and it keeps going higher, at what point do you recognize you were wrong and get back in?

Therefore, try to follow this rules:

• every year do estimate the amount that will be set aside to invest.

• divide this amount by 12.

• make sure you invest the resulting amount every month of the year, rain or shine.

• treat it as an automated process removing any second guessing.

• it will push you to invest, even during months when emotions run high and when you might be tempted to retreat due to fear of a correction.

• it will prevent you from going "all-in" in a short amount of time, which could diminish future returns if your timing is unfortunate.

Rule # 2 - Define your max allocation to a stock / copy

There are many opinions out there about what that maximum basis exposure to a single company or Popular Investor should be, in a healthy portfolio. It all comes down to your risk profile, time horizon and goals. If you don't want to let one single company put your overall portfolio performance at risk, a cap anywhere from 5% to 10% is reasonable. The same applies to capital concentration in a particular Popular Investor. I would even say that you should not copy more than 10 people because you can easily lose control over their activity.

Rule # 3 - Don't judge too quickly and superficially

When can a portfolio or its copy be assessed as poor performer? I'm not talking about portfolios / stocks that are down 10% or 20% only the days or weeks after starting the investment. These are merely opportunities to very slowly build up a position. Small movements in the short term are rarely indicative of anything wrong with the business or the thesis. I'm not talking about draw-downs clearly correlated to wide market sell-offs or sector rotations. These are meaningless to the underlying business within the portfolio.

The definition of a loser will be very different from one investor to another. But I do agree that losers are stocks / porfolios that are in the red over a long period of time. Don't let them get in the way of your overall portfolio success. But also, don't judge a long-term strategy of a given Popular Investor after 3 or 4 months. Because it is not a long term at all.

Rule # 4 - Don't sell your winners

Now the next essential rule to protect your portfolio from yourself is one related to the selling process. And it's a rule that is incredibly simple to execute on. It merely requires you to leave your winners alone, for years on end. It is also the first rule of compounding: Never interrupt it unnecessarily. Many investors can't help but cash in on their gains as soon as a stock is up 20%, 50% or 100%. They might buy back the shares at the same price or higher several months later when they realize their mistake. But the damage has already been done.

Your best performers (stocks / copies) will take you through an emotional roller coaster many times (see chart below). Recognizing that most things in life are not linear is an essential step to embracing the unknown as an investor. By not selling your winners, you are letting your most precious source of alpha growth do the work without interruption, even when your stomach tells you otherwise in the short term. It's also interesting to note that investing primarily in the digital economy - which is my area of ​​expertise - was generating strong market-beating returns beforehand and I'm sure it will be in the future as well.

Rule # 5 - Don't trade too much

Great long-term investing is 1% buying / copying, 99% waiting. But most investors feel that they're lazy if they don't tinker with their portfolio / copies regularly one way or another.

A disciplined investor should look beyond the short-term concerns and focus on the long-term growth potential of the market and his investments. Despite history telling us that trading in and out of stocks or copies is a weapon of alpha growth destruction (and cost generating), some investors can't help themselves.

Rule # 6 - Don't chase short term returns

Performance chasing refers to selling a poorly performing investment to buy one that has recently delivered strong returns. Chasing returns is the practice of taking excessive risk by selling what you own in order to concentrate heavily your portfolio into what everyone else is buying. You shouldn't suddenly sell all your under-performing holdings (or copies) and blindly replace them by the top performers of the market at any given time. Switching your money from big losers to whatever is "hot" can lead to selling low and buying high. There is nothing wrong with re-allocating some of your portfolio from losing to winning positions or copies, but it must be done with extreme vigilance.

Rule # 7 - 100% cash in hand is wrong in most cases

When the market is volatile, it can feel much safer to watch it from the sidelines. And that's generally a mistake. Cash itself is a depreciating asset, but it's also an essential tool to buy other assets. Finding the right balance of cash in an investment portfolio can be a challenge, particularly for those who are not generating new income or savings to add to their investment portfolio. If you have more than 50% of your liquid assets in cash, you are likely permanently damaging your long-term returns. I try to have about 20% of my capital parked for possible quick bargain purchases.