It’s the start of a new investing year. This can be the year you outperform the S&P, and take back the pride in your portfolio you were meant to have. At the end of the year you are going to look back at 2020 and think about how you set yourself up for success. The time to start preparing yourself for what may come this year is now. Here are six investing tips for 2020:
- Control your emotions.
The first thing on the docket is to not let your emotions rule the way you buy and sell. Emotional trading is defined by buying and selling positions in your stocks at the most inopportune times. I can tell you that this year is going to follow the same pattern as the year before, and year before that, and year before that. There is going to be uncertainty around every corner. Here’s how we are going to deal with this uncertainty; we are going to keep our position choices and sizing appropriate. When you overweight one of your high beta stocks and uncertainty grips Wall Street, your high betas are going to get flipped-turned upside down. If you keep the concentrations of these positions low, these wild swings will not hit you like a wrecking ball.
- Avoid the “Fast Money” lure of Options and Penny Stocks
Look, I understand the allure of getting rich quick. I would love nothing more than to watch my favorite penny stock biotech make a twenty-thousand percent run and turn me into the next multi-millionaire in the blink of an eye. The truth of the matter is that these types of glow ups are not only few and far between, but they are just about as predictable as winning a million dollar scratch off. The people that win these types of trades have lost about 99 of their last 100. Basing your portfolio strategy around a “guru” you found on Twitter is a losing one. An investment guru who focuses on anything other than wealth building is a fraud.
- Don’t be afraid of pullbacks
I have written before about the dangers of taking heavy drawdowns. Yes, this is typically something you want to avoid at all costs. However, there are going to be times throughout this year where the market has a sharp pullback based on a “you name it” kind of event. I’ve noticed that when we are positioned the most poorly is when we have a physical wince to sharp one day, week or month long corrections. These need to be the times when we are thinking about rebalancing and adding to our current positions. If you have money waiting on the sidelines and the market pulls back 5-10%, you need to deploy those funds into your winners. The reason this is one of the most important investing tips of 2020 is because this is going to multiply your wins when the market bounces back. Many economists have said that growth is slowing, however, we are still blasting to the moon. As long as we are still advancing, dips are to be bought.
- Your investment timing needs to be Long Term
The SPY ETF has had an epic run since the great recession. Over that time, there have been 93 out of 122 positive periods month to month. That equates to 70% win ratio. That is nearly unheard of for a money manager. Find me a manager that can get you a 70% win ratio for their stock picks and I’ll show you a literal billionaire. The point here, is that is over an 10 year period.
Let’s say you are in this whole “stock market” thing for just a couple of months to make a quick buck and low and behold you pick the beginning of a massive pullback, a la October 2018. You are going to be pretty immediately disheartened and not want anything to do with this “rigged market” anymore. You pull out all your money after the third month in a row after your investments have accumulated losses of more than 20%. “Thanks, OBAMA!” you say, for some reason putting all the blame on anyone but yourself. Meanwhile, your best friend Pedro gets in the market at the same time and realizes a record breaking 30% gain in the 11 months following. Be like your wealth building friend, Pedro. Invest for the long haul.
- Visualize your success, and your failure
Athletes and competitors are constantly told to visualize their successes, whether it be scoring goals, spelling the words correctly, or whatever your favorite method of winship entails. While this is important, I want you to visualize your own failure. And if you’re reading this, you aren’t a failure. You have access to the internet, so therefore you aren’t out on the street begging for change. I’m talking about failure in terms of how you’re going to feel when you don’t listen to yourself. That internal voice that is telling you to push harder, ignore your gut feeling that this might be a “bad decision” to buy that penny stock for the 45th time. “This time it’ll be different.” This is not conducive to healthy wealth building. This is one of the most important investing tips for 2020.
There is nothing like building a fresh new portfolio. I’ve heard it likened to when your child is born. It’s a clean slate, new opportunity. When you take the appropriate steps to ensure you are responsibly building a portfolio, you will be setting yourself up for success. If you are having trouble with what to tell yourself when picking stocks, start with the last point:
- Is this stupid?
I spend an enormous amount of my free time building portfolios for friends and family that will outperform the market. I look at metrics whether it be largest drawdowns, standard deviations, Sharpe and Sortino Ratios and correlations. I have built plenty of portfolios that look amazing on paper and would crush the S&P every single year. But after every portfolio I build, I look at the overall construction and ask myself one question, “Is this Stupid?” It’s a simple question, but very effective.
Let’s take for example one of my favorite portfolios, 25% weights of Microsoft, Apple, Google and Amazon. On paper, this portfolio, since 2009 has crushed the S&P by a margin of nearly 5:1. The Sharpe Ratio is high, the standard deviation is low, the maximum pullback is barely worse than the S&P, and the best year was a return of 117%. However, is this a stupid portfolio? Yes. This is an idiot portfolio. A 4 stock portfolio with enormous concentration risk to Tech, huge position size and an inability to truly control the downside risk makes it very stupid. Yes, on paper it looks like a foolproof money maker. But you need to be able to ask yourself honest questions when putting your life’s work at risk.
With these six investing tips for 2020, you will be setting yourself up for one heck of a successful wealth building year.