Trading by amateurs is stupidity in its most sophisticated form I have ever seen.
Just imagine, instead of buying stocks from the market, you are buying stocks from a guy called Mr. market. He is a crazy heavy, drinking maniac depressive who, without fail appears daily and names a price for the stock at which he will buy your shares or sell you his.
And timing the market is same as trying to read the mind of a crazy maniac. pointless. You are trying to find patterns where there no patterns. trying to rationalize the irrational.
Now you might get lucky once or twice, but if you do continue along this path you will end up where 95% of traders end up, losing money.
And because of this, many people strongly dislike investing in the stock market, and we need to understand what a stock market fundementally is. For any country to grow it needs to have successful business, more the better. So if a country grows, then the stock market has to grow (in the long term). In the short term stock market is a voting machine and in the long term it is a weighing machine. The problem is people try to time the market and buy individual stocks based on a stupid investment manager’s advice or, worse reading a newspaper article(if it is in the news, it is already too late to time the market). What we need to buys are indexes which are a combination of stocks. Unless you are betting on the country failing, you will win.
In 2008, warren buffet issued a challenge to the fund managers, which in his view, charged exorbitant fees that the funds performance couldn’t justify. Over a period of 10 years a low cost index fund will beat the best stock pickers(the people who try to time the market). Protege Partners LLC accepted, and the two parties placed a million dollar bet. And after ten years buffet won the bet. Buffets ultimate successful contention was that, including fees, costs and expenses and index fund(index fund is basically owning the entire market instead of picking stock, you invests all your money across all stocks) would outperform and hand picked portfolio of hedge funds over 10 years. They bet two basic investing philosphies against each other: passive and active investing.
A fun fact: owning the market beats 96% of hedge fund managers. you don’t actually need mututal funds!
Two types of people invest, one who want spend their rest life, drinking pina Coladas in the beach, and other who just don’t want to lose their money.
There is a golden rule in portfolio management. Diversify. In fact, most advisors will ask you to have a balanced portfolio. Balance sounds good, right? Balance tells us we are not taking too many risks. And that more conservative ones offset our risky investments.
The conventional balanced portfolio is usually divided up between 50% stocks and 50% bonds(60–40 if you are more aggressive). Suppose you have 10,000 to invest. According to conventional wisdom, you will invest 5000 in stocks and 5000 in bonds. By diversifying the money this way, many would think that they have diversified the risks, but the reality is you have taken more chances than you think. Because stocks are three times riskier (volatile). The risk is more like 95% in stocks instead of 50%.
The key is not to diversify capital. You have to diversify risks.
Different asset classes perform in different manner in different economic conditions.
There are four primary economic environments that affect the value of assets.
1. Inflation
2. Deflation
3. High economic growth
4. Low economic growth
If there are only four economic seasons, it is better to have 25% of the risks in each season. We know that there are good and bad environments for all asset classes. And as we know, there will be a ruinous environment for one of those asset classes in one’s lifetime. That’s been true throughout history. If we diversify risks across those four seasons, the portfolio will perform the same way throughout our lifetime.
And that’s what Ray Dalio did he orchestrateda fund called all-weather fund, which will perform across all macroeconomic conditions.
The portfolio would be as follows;
1. 30% in stocks(it’s better to select some index than any individual stocks)
2. Then you need long term government bonds. 15% in intermediate( 7–10 years) and 40% in long term bonds( you may wonder why such a large percentage in bonds, this is to counter the volatility in stocks. And by going long term, it will potentially bring significant returns long term.
3. And finally, 7.5% in gold and 7.5% in commodities.
And lastly the portfolio must be rebalanced periodically(typically once every three months). When one segment does well, you must sell a portion and reallocate the amount back to the original allocation.
This portfolio is designed in a way to give consistent returns irrespective of the mood of the market. This is to minimize the portfolios’ volatilities and give us peace of mind. Because the human mind is not good at dealing with large swings with our life savings. And that’s why average people make stupid investment decisions, like cashing out when the maket is down andbuysing stocks when they are up(when it is the other way around). Sure you may find mutual funds that can give you higher returns, but they do this my increasing the % of stocks. That’s why when they rally, they go up considerbly but also lose considerably when it goes down. So the question arises how did the all weather fund performed in the past, because history repeats itself, it can be said with almost certainty that the fund will perform the same way in the future.
As you can see tracing the fund back for the past 75 years the fund has lost money only for 8 years and the largest drop being just 3% !
Disclaimer: I firmly believe that people with great experience should only voice their opinions, not every moron with a Twitter handle. And I have zero experience with investing money. But that doesn’t matter because these are not my thoughts. They are ray dalio’s, a self made billionaire who runs the world’s largest money fund(160 billion). You need a net worth of 5 billion and be willing to invest 100 million just to talk to this person).
