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Do you also feel left behind after the positive market movement?
I do, but not really. Because the markets are up in spite of:
- Inflation increasing
- Interest rates going up faster than expected and it does not look as if they are stopping anytime soon.
- Spending power of everybody decreasing because of the increasing costs, and I am not just talking energy. (As I wrote my gas price is going up over 200% in October!)
Nothing positive that should drive markets up I am sure you will agree!
Why are markets up?
Why are markets up? Is a question I have asked myself too many times.
For example, at the moment I am wondering:
- Is it momentum traders simply jumping on a small bear market rally?
- ETF investors piling in, and the funds must buy the market.
- Why are European markets up if European ETF have had huge outflows this year?
No one knows why
After asking these, and 100 related questions, I have come to the realization that I have absolutely no idea.
The thing is nobody has.
You know market movements are the end result of millions of people worldwide making, what they think, are the best decision they can.
This is something I keep telling myself if markets are doing something that I do not understand.
What is happening is just far too complicated to explain in simple sentence. And this is in spite of the simple explanations you see in the media all the time.
Get back to what you can control
After thinking until my head start smoking, I realize I must come back to simple steps that I can control.
And ask myself - how I can make the best decision with my money now.
This means following simple rules that I have put together over more than 30 years of investing.
- Buy cheap quality companies
- Do not buy into falling markets
- Stop losses fast
- If markets are falling build a list of companies to buy when they turn.
Exactly what we do with the newsletter
This is what I have been recommending in the newsletter.
It sounds boring but it works. It is the best strategy I know not to get caught up in the feeling that I am falling behind the market.
Getting back to inflation
I have received a lot of e-mail from subscribers worried about inflation and what to do with their money.
Let me ask you. What does your portfolio look like?
Mine is about 40% cash and it is not earning anything if you hold it Euros. Am I worried that the purchasing power of my money is decreasing daily because of inflation?
No, I am not because the alternatives do not look attractive, for all the reasons mentioned above.
So, I am sticking to my plan, and I suggest you stick to yours.
Now on to the Mind Game part…
The Mind Game
Rule #8: Do not mix your portfolios
To get solid long-term returns you must find a way to stay invested in spite of losses and negative returns in some years.
This is a LOT harder than it looks.
The best way I found to do this is to divide your portfolio into three sub-portfolios.
This portfolio is to cover unexpected cash flow needs for example if you lose your job or an unexpected emergency.
The idea with this portfolio is to provide safety so that you can stay invested with your other portfolios.
It has a five-year horizon and typically holds short term investments cash, money market funds or short-term bonds.
This portfolio is invested in conservative low volatility investment with growth potential. It must compensate you for inflation and create a bit of excess income above inflation to fill up the Safety portfolio.
The investment horizon of this portfolio is from year six up till your retirement. In my case in about 15 years’ time.
Typical investment in this portfolio are medium term bonds, real estate investment trusts and other defensive alternatives (for me this includes tobacco stocks as I have mentioned)
This portfolio contains all your long term, more risky assets that you need to grow your portfolio to provide for you in retirement.
Ideally this portfolio will only be touched once you retire. This means it has a long investment horizon.
Typical investment in this portfolio includes equities, ETFs, and illiquid alternative investments.
Do separate reporting
Always show the return of these three portfolios separately. As well as why you have them.
This is important so that you can separate the three ideas in your mind and KEEP them separate.
This means the returns of the:
Safety portfolio will be low but very stable with no negative years. This is exactly what this portfolio must do.
Income portfolio will be more volatile, higher returns, small negative years in between, but overall stable and positive.
Growth portfolio may have large positive and negative years. BUT because you are showing it separately, and your investment horizon is long term (15 years in my case) the volatility will not have a strong emotional impact.
You know this money is invested for the long term. Ups and downs are normal for the type of investments that you have here.
This will make it easier to stay invested and stick with your investment strategy.
Most importantly it will stop you from:
- Moving funds to stocks when the market has performed or
- Selling out and moving to cash at the lowest point in a bear market.
The three portfolios help you
The three portfolios help you as the Safety and the Income portfolios lessens the impact of changes in your Growth portfolio.
This lets you stick with your investment strategy, and this is the MOST important thing you have to do.
Your, helping you stay invested analyst
PS I know markets are still uncertain BUT have you already started building your buy list? If not, why not sign up today and start now.
PPS It is so easy to forget and put things off why don’t you sign up right now?