Sunday, December 27, 2015

Juz some Chartz and Shizz

Too Long, Don't Wanna Read: In 2016, (other people say) bonds up (ergo bond yields down), stocks down.





In this "new-normal" world that we live in, I think far too many people excel in copy-pasting cookie cutter strategies that have been churning out money over the past few years. The fact of the matter is, as long as you went long (pun intended) on pretty much anything in the current (debatable) bull market, you would've made money. In fact, that's exactly how people have been making money for decades - being long in a bull market.

However, what is going to determine the future winners and losers (not stocks or asset classes, but individuals) will not be what they did in the past. It would be how they manage what will happen in the future. When I talk about risk management, a lot of people look slightly dumbfounded to me. "Hey buddy, I've diversified, all right?". But diversification is NOT the hail mary of all risk management. Sitting in cash and having "inflation erode away your purchasing power" (which is hardly the truth or painful in the world of deflation that we are living in) is viewed by many as laziness or cowardice for having inaction. I say, deciding to hold cash itself is a risk management decision. Cash is an asset class, so this is asset class diversification in play here, which is different from index ETFs which diversify after an asset class has been selected. Breaking it down even further, how do you want to hold your "cash"? In fixed deposits? In multiple currencies? In several banks to the SDIC limit?

Do you average down with losers? Or do you sell them off and all-in at the "bottom"? Anyone who imposes one strategy as better than the other clearly does not take into account that all individuals are different. Can one emotionally bear to realize such losses? Can one overcome fear and dump it all back in? Can one sleep knowing they are holding onto stocks that are dropping every day? There is no ONE way, but clearly certain paths have different pros and cons, which different people can use to suit their style and excel with one way compared to another.

When I talk about risk management, it isn't about your specific investment. It's about having a framework in your LIFE that can deal with a variety of risks, which could then in turn affect your financial portfolio. You bought a great LONG-TERM stock that is currently suffering TEMPORARY price depression? Fantastic, if you don't need to liquidate it. If you're out of a job and you don't have an emergency fund, it doesn't matter if you can see guru insight and can see future stock prices, you need to liquidate at a loss to feed yourself. 

I don't know what 2016 will bring, and neither does anyone else. I can only make logical (in my mind, debatable) guesses and position myself to be ready to handle the most likely environments to achieve the best outcomes for me.

Just like how watching a live screening of your favourite soccer team doesn't increase their odds of winning, owning and hoping for your investment to go up isn't a very good strategy either. Your investment does not know that you own it. All Singaporean men lose their "eye-power" special abilities once they finish NS, so refreshing your portfolio every 5 minutes will not make it go up.

Stocks and bonds can go up or down, in fact they do that on a daily basis. It doesn't matter what they do. It only matters what you do.

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