Investing Chitra Katha: How to invest money in your 30s

This is my investing strategy..

1.Faith in equities


The real equity return was positive in every country, typically at a level of 3% to 6% per year. Equities were the best-performing asset class everywhere.

The Indian version of the same book..

2. Your faith will be regularly tested..

3.Discipline to invest regularly

Jadav created an entire forest single handedly, spreading across 1,360 acres.
The forest contains several thousand varieties of trees and has attracted elephants, rhinos, deer, wild boars, reptiles, vultures, and Royal Bengal tigers. 

A simple monthly investment in equities done consistently through market ups and downs over a long period can create a similar magic!

4.Patience

5.The power of compounding

6.Focus on 2-4 good funds

7.Choose experienced fund managers

8.Lower Costs – Choose Direct plans

9. Initial 10-15 years, financial capital is a small portion relative to future human capital => Focus on saving more and maximizing equity allocation

Asset Allocation, Market timing etc can wait till your financial capital reaches a reasonable size relative to human capital!

10.Automate the whole process

You can track the progress of the above strategy here

If you loved this post, do share it with your friends and don’t forget to subscribe to the blog via Email (1 weekly newsletter) or Twitter along with the 5000+ awesome people. Look out for some fresh, super interesting investment insights delivered straight to your inbox.

If in case you have any feedback or need any help regarding your investments or want me to write about something, feel free to get in touch at rarun86@gmail.com

You can also check out my other articles here

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.

Advertisements

A video game approach to managing money

Just like in a video game, to get better in any field, there is usually a sequence of skills and problems to be mastered/solved progressively, one level at a time.

Managing your money is no exception.

But unlike a video game, where the levels are clearly defined and you don’t move up until you clear the current level, the “levels” in personal finance are unfortunately too vague.

And here begins the confusion..

  • Is HDFC Top 200 better than Reliance Large cap?
  • Is Nifty ETF better than a large cap fund?
  • Should I directly pick stocks or stick to mutual funds?
  • What is the impact of rupee depreciation on Indian equity markets?
  • Will elections have an impact?
  • Why do debt funds suddenly give negative returns?
  • How do I exit before the top of the market?
  • Is there a way to improve my SIP?
  • Small caps vs Mid Caps vs Large Caps – which one?
  • Direct vs Regular plans?
  • Dividend vs Growth plans?
  • and the story continues..

No doubt, there are too many questions. But which one do we solve first?

Not knowing where to start and which level a question belongs to, we confuse ourselves into thinking that we need to have answers for all these problems before we actually start investing.

So we end up trying to solve each and ever problem by endlessly debating, listening to CNBC anchors, watching interviews, reading newspaper articles, blogs, asking for advice from friends and family etc.

By the end of all this intellectual exploration, we fall into two categories with regards to our money:

1. Bogged by the complexity, we completely ignore taking any sort of a decision and feel guilty
2. We continue to obsess over finding a perfect solution by arguing over minor details and don’t take action.  

Sadly, both the options yield the same results – None.

So what is the solution?

JUST START!

Yup, you heard it right. That is exactly the solution.

Now, this means we need to take a step back from all the confusing overload of jargon and information thrown at us, and just like a video game need to solve it one level at time.

As Eighty Twenty Investors, we shall first solve for the simple yet critical problems which will help us build a 80% good enough money solution. Over time we shall gradually progress and improve over and above the 80%.

No while this is an evolving thought process, if I were to personally start it over all again, this is the hierarchy I would go about to manage my money.

Level 1: Spend less than you earn = Save the remaining

When I first started my fitness journey, I deep dived into a quest of finding the best exercise routine, best protein powder, best diet, best shoe, best time to workout blah blah.

6 months later still trying to find out the best solution, I realized the problem was much more basic – I had to first solve for inculcating the habit of regularly going to the gym!

Similarly, when it comes to investing, the starting point is fairly basic and simple – if you can’t save enough, all other things don’t really matter.

Yet ironically, most of us focus on all the complex nuances of investing conveniently forgetting the starting point.

Now if you are wondering why in the world am I making such a big issue out of this. Check these two earlier articles to realize who we are up against and why incrementally saving money is going to become a huge problem..

So the first ground level problem to solve – How to save enough regularly?

Level 2: Emergency Fund

Once you are done solving for the habit of saving regularly, we come to the level 2 problem – building an emergency fund.

As we all know, emergencies are a fact of life. A sudden job loss, medical emergency, unexpected home repairs, car accident, dropping your mobile phone and the list goes on.

Saving up for an emergency fund is a simple way of acknowledging “Shit happens! Let me be prepared” 

A good starting point would be to build around 6 months of your monthly expenses in a safe, liquid and stable investment option such as

  1. Separate Savings Account
  2. Bank Fixed Deposit
  3. Liquid Fund (preferred option)

Level 3: Insure your life and family’s health

The next step is to go ahead and get

1.Health Insurance for you and your family
2.Life Insurance: Simple plain vanilla Term Cover

This is an extremely confusing exercise given the myriad of choices and features and maybe sometimes in the coming months I will do a separate post on how to choose health and term insurance.

Remember: Never ever mix your investments and insurance

The best part is all the decisions till now – emergency fund, health insurance and life insurance are usually one time decisions. Once you decide on the product, then all you have to do is to regularly pay your premiums in case of insurance and in case of an emergency fund, keep investing a small amount monthly till you reach the required savings to cover 6 month expenses.

Level 4: Simple Goal based Financial plan

The 4th level, is to create a simple goal based financial plan.

Find below the required steps:

  • List your financial goals (kid’s education, early retirement, buying a house, starting a business etc)
  • Estimate the time frame for every goal
  • Approximate the current costs
  • Adjusting for inflation calculate the future costs
  • Calculate the amount to be saved (either one time or monthly or a combination of both)

The below articles can be a good starting point on how to get this done..

  1. A simple trick to estimate your future costs in 2 minutes (Link)
  2. Create your own financial plan while you are waiting at the traffic signal (Link)
  3. See how easily you can create your own financial plan in 15 minutes (Link)

Level 5: Get short term goals (<5 years) sorted

Since the time frame is very low, it is not advisable to use long term asset classes such as equities given the significant ups and downs in the short run. Hence the idea would be to stick to a safe debt or arbitrage oriented portfolio.

Level 6: Long Term goals

Once you have solved for all the above levels, this is the final level which is simple yet not easy to master. This level has to be broken down into sub levels and solved one piece at a time

Let us check out the sub levels..

6.1.Investor Behavior

Time and again it has been observed that investment returns and investor returns are almost always different.

You earn the investment return if you invest your money and then don’t touch it. No buying, no selling, just holding.

But in reality, people rarely invest this way. They sell in fear when markets fall and buy in greed when markets move up. Most of us chase performance and invest by looking in the rear view mirror.

Source: Behaviorgap.com

This gap in investor returns vs actual investment returns is called as The Behavior Gap.

The key is for the investor not to get carried away in greed during a bull market and in fear when the markets are falling.

You can read this post to get a sense of a real life example of how greed played its part in luring investors.

  • Seat Belts, Condoms and the Indian Equity Investor (Link)

Also you can refer to these posts to understand how to handle a falling market.

  • Three ways to make sure this stock market correction is not wasted (Link)
  • If you panic during a market fall it’s not your fault. Blame it on.. (Link)
  • A guilty father who shot his own kid, ancient Greek philosophers, US Navy Seals and the art of handling a market fall (Link)
  • “What if things go wrong” Investment Plan – (Link)
  • 6 reasons why we panic during a market correction (Link)

Finally it all boils down to this..

The most important part of an investing strategy is your ability to stick with it. A subpar investing strategy that you can stick with and apply consistently will nearly always outperform a brilliant strategy you give up on. Your final investing results probably won’t be determined by whether you currently use a strategy that historically delivers an extra 50 basis points of return. What will matter is whether you had the disposition to stick with investing, however you chose to do it, through thick and thin.

Morgan Housel

6.2.Asset Allocation

Different asset classes come with different return expectations and risk (i.e how wild they fluctuate in the short run)

A quick rule of thumb for setting return expectations would be

Equity: Inflation + 5-7%
Real Estate: Inflation + 3%
Gold: Inflation + 2%
Debt Mutual Funds or FD: Inflation+1%

The choice and the mix of assets in your portfolio will have the largest influence on your long term returns.


Now typically equities are the best choice for long term allocation but the cost that you pay for higher returns is the sharp falls the asset class goes through in regular intervals. In fact a 10% fall once a year, 20%-30% fall once in couple of years and 40-50% fall atleast once a decade is unavoidable.

So depending on the extent to which you are comfortable with seeing your long term portfolio decline, decide on your equity allocation.

A rough rule of thumb would be:
Equity Allocation = The maximum near term % decline you are ok to see in your portfolio * 2

So if you are ok with upto 30% decline then go for around 60% in equities. The remaining 40% can be in debt mutual funds.

6.3. Risk Management

This is where you try to put “investment behavior” part into practice.

The philosophical question goes like this:

Should you try changing the investor or investment?

While in the “Investor Behavior” part we try and address the investor, in this section we try and evolve the investor portfolio to adapt to the behavior of the investor.

This is based on the reality that – the ability to take risk (or what is called risk tolerance) of the investor is not a constant. The recent market performance has a huge influence on the risk tolerance where usually investors become high risk takers in a bull market and low risk takers in a bear market.

Thus we need to introduce risk management. This in normal human language means – we need to actively adjust the equity allocation based on our evaluations of risks in the market (a combination of valuation, earnings growth, sentiment etc)

If you find this going over your head, no worries, just stick to simple process of re-balancing back to original asset allocation – either annually or whenever equity allocation deviates by more than 10% from the decided allocation

6.4.Geographic Allocation

Once you have decided on the asset allocation, the next decision is to decide on which countries businesses (equity) do you want to bet on. Logically, most of us will start of with our home country (India in my case).

But sometimes, there is always the rare possibility of what if it turns out to be like Japan!

Source: https://pensionpartners.com/the-nikkei-straw-man/

So while many people argue on why you shouldn’t bet on equities citing Japan’s case, but I think the actual takeaway is to diversify your equity exposure across global businesses.

6.5.Category Choice

This is where you solve the question of mutual funds vs direct stocks.

My suggestion would be to start predominantly with mutual funds and have a small portion of your portfolio to direct stocks. If you enjoy the process of stock investing, can spend time to research, then based on your evolution and performance over a 5 year period you can gradually move towards a stock based portfolio.

For the majority 95% of us, mutual funds will do the job.

  • Within mutual funds again there comes the question of: Passive vs Active
  • Within active funds comes the question of: Diversified vs Sector Funds.
  • Within diversified funds comes the question of: Large Cap vs Mid Cap vs Mutlicap

You can read my thoughts on the above topics via this article

  • What if Steve Jobs was an Indian Equity Investor (Link) .

6.6.Security Selection

In this stage, you figure out how to choose equity and debt funds from various categories.

You can refer to these posts to get a fair idea on how to go about with this

  • Selecting an equity mutual fund is a pain in the neck! Find out why? (Link)
  • What if Steve Jobs was an Indian Equity Investor (Link)
  • How do we experience good performance (Link)
  • How to select equity mutual funds the eighty twenty investor way – Part 1 (Link)
  • How to select equity mutual funds the eighty twenty investor way – Part 2 (Link)
  • How to select equity mutual funds the eighty twenty investor way – Part 3 (Link)
  • Here’s how I finally set up my investment portfolio for the next 10 years (Link)

You can also refer to these posts to pick debt funds

  • A primer for investing in debt mutual funds (Link)
  • 8 factor framework for analyzing any debt mutual fund (Link)
  • Investing Chitra Katha – Understanding the impact of modified duration on debt fund returns (Link)
  • The ultimate guide to liquid funds (Link )
  • Here’s a quick way to select Ultra Short Term Funds (Link )
  • Making sense of Short Term Debt Mutual Funds (Link)
  • Credit funds – Don’t count your returns before they hatch (Link)
  • Here’s why I don’t invest in credit funds (Link)
  • Figuring out a simple do-it-yourself framework for short term investing (Link)

Stock selection is an ocean in itself. I would suggest you start with websites such as https://www.drvijaymalik.com/ , https://www.safalniveshak.com/ etc

6.7.Cost

In Investing, You Get What You Don’t Pay For

John.C.Bogle

Globally passive investing (via ETFs) have gained significant popularity in recent times. Their pitch is simple – Buy an entire index covering all major stocks and get it at the lowest cost.

In India, while we are still some time away from active funds losing their edge, large caps is a segment where there are initial signs of passive funds giving a tough competition.

Direct vs Regular?

SEBI in 2013, introduced a new option in mutual funds – “Direct” option
to provide an option to invest in mutual fund schemes directly, without the involvement of any agent, broker or distributor as the case in “Regular” mutual fund plans.

Regular and Direct plans are just the two options of the same mutual fund scheme, run by the same fund managers who invest in the same stocks and bonds.

The only difference between the two is that in case of a regular plan your AMC or mutual fund house does pay a commission to your broker as distribution expenses or transaction fee out of your investment, whereas in case of a direct plan, no such commission is paid. Instead, in case of direct plans the commission is added to your investment balance, thereby reducing the expense ratio of your mutual fund scheme and increasing your return over the long-term.

The advantage of direct funds is that their expense ratios (the charge of the mutual funds for managing your money) is usually lower by 0.5% to 1% compared to regular plans.

So always chose a direct plan (and even if being advised by an advisor pay his fees directly which keeps both your incentives aligned)

6.8.Tax

Once you are done with all the above steps, then you can also evaluate the taxation for various investment options and choose a tax efficient vehicle to access the underlying asset class.

Summing it up..

Now the next time you are caught up in a debate of say which fund to choose, passive vs active etc, relax, take a deep breath and ask yourself if you have solved for the levels before that.

If not, get the basic ones sorted first.

Most importantly, don’t get into the never ending loop of debating the minor things in search of the perfect solution.

Solve these levels one step at a time and in a few weeks you will have your 80% solution ready. Trust me, you will be much better off than the majority who still are in search of that elusive perfect investment solution.

And anytime you catch your friends getting caught in this trap, send them this article.

As always, Happy Investing folks…

If you loved this post, do share it with your friends and don’t forget to subscribe to the blog via Email (1 weekly newsletter) or Twitter along with the 5000+ awesome people. Look out for some fresh, super interesting investment insights delivered straight to your inbox.

If in case you have any feedback or need any help regarding your investments or want me to write about something, feel free to get in touch at rarun86@gmail.com

You can also check out my other articles here

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments.

Remember this before the next bear market arrives

In my earlier post here, I had discussed on how a “what-if-things-go-wrong” plan helps you preload your decisions and reduce the no of decisions during market fall.

Since this thought process has evolved only recently for me, I have not really got the chance to test it out as I am waiting for the next fall.

As always I have my doubts as to –

What if this is just some fancy intellectual gyaan?

Let us use history as a guide and check if this makes practical sense..

As mentioned earlier, the primary objective is to –

Reduce the number of decision points during a market fall

Let us check if our plan helps in this endeavor.

So let me time travel back by 28 years (since Nifty Index was started) and check on how many decisions I needed to take when markets started to fall.

In the above chart the orange line represents the % fall of Nifty from its previous peak value on each and every day for the last 28 years. This is called draw down chart.

But here is something that will shock you:
In the last 28 years, for 94% of the days Nifty was down from its previous peak!

That simply means I will almost, always have to go through the retrospective feeling “If only I had sold earlier..”.

Here is the killer – Along with it the decision on “Will the market go down further?” will also need to be taken on 94% of the days!

Earlier, I had always believed that markets were too volatile and decisions have to be made real time – each and every time the market went down. The decision could be anything – to reduce/exit equities, to buy more, to hold etc.

Now to put that in context, that meant in the last 28 years I would have had to make ~6482 decisions as for 6482 days out of 6893 days the Nifty draw down was negative !

Take a pause and get that number into your head – we are looking at around 7000 decisions over the next 30 years. Phew.

Ok. To take a decision for each and every minor fall is stretching it too far. Let us say, we need to take a decision only when the fall (read as fall from previous peak) is more than 10%.

Any guesses on the no of decisions?

4171 decisions in the last 28 years. That is almost 150 decisions every year!

What if its only for a fall above 20%?

Still we are left with 2734 decisions.

Now you get the gist.

Too many decisions..

The moment we start looking at each and every fall as a decision making point, it becomes extremely stressful as the near term is always uncertain and there is nothing much you can do about the how the markets should behave.

Further, the more the number of decisions we need to take, the higher is the possibility of panicking out of the market.

Deciding when to decide..

Let us check how our new approach of reducing the decision making points to 10%,20%,30%,40%,50% would have fared.

There have 19 instances in the last 28 years where, the bare minimum 10% drawdown trigger has occurred.

Out of 19 occurrences, only 3 times did the 10% drawdown actually get converted into a 50% fall. This means a 50% fall is a very rare event and in the next 30 years going by history we might see only 3-4 of them.

Similarly, only 9 out of 19 times has the 10% drawdown actually become a 20% correction. 

So the takeaway for us is that – a 10% drawdown is too common while a 50% is too rare.

So let us keep our decision making points to 20%,30% and 40% fall.

This implies in the last 28 years, our decision making points during a market fall has been dramatically reduced to 9 periods and just 20 decisions !

So our strategy of “deciding when to decide”  does make sense.

Summing it up..

Hence our “What if things go wrong plan” will have

  • 20% fall
  • 30% fall
  • 40% fall

as our decision making points..

Now we are left with the interesting second part – preloading decisions for these 3 scenarios.

How do we do that?

Hang on for the next part..

If you loved this post, do share it with your friends and don’t forget to subscribe to the blog via Email (1 weekly newsletter) or Twitter along with the 5000+ awesome people. Look out for some fresh, super interesting investment insights delivered straight to your inbox.

If in case you have any feedback or need any help regarding your investments or want me to write about something, feel free to get in touch at rarun86@gmail.com

You can also check out all my other articles here

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments




A guilty father who shot his own kid, ancient Greek philosophers, US Navy Seals and the art of handling a market fall

In our last week’s post here we had explored how a small almond shaped component in our brain called the amygdala is the main culprit behind why we panic during an equity market fall.


Photo courtesy: http://www.wiredscience.com

But can the amygdala be this powerful?

Hold your breadth.

It made an innocent father kill his own child.

Source: https://classic.esquire.com/article/1995/3/1/the-right-to-bear-sorrow

Startled Father Fatally Shoots His Daughter

It was the November of 1994..

Fourteen-year-old Matilda Kaye Crabtree was hiding in a closet, playing burglar. Her father Bobby Crabtree, who didn’t know she was home, pulled open the door with gun drawn.

“She went, `Boo!’ and that scared him,” said Stacy Redding, who crouched with her friend in the closet, and then watched as Robert Crabtree fatally shot his daughter in the neck.

Kaye’s last words to her father: “I love you, Daddy.”

You know who was the real killer.

As a fear response, Bobby’s amygdala had kicked in and his body reacted way before he could be conscious of what he was doing.

While Bobby was not prosecuted as what had happened was an accident,  you can imagine the pain this father had to live with throughout his life.

The lesson for us is clear – Don’t underestimate the amygdala!

So, what if we removed the amygdala?

But hang on..not so fast

Without amygdala, the guy would never be walking again.

So doing away with the amygdala is again not an option given its ability to save us in a lot of other contexts.

We simply need to learn on how to handle amygdala and manage our fears.

Million dollar question – How do we manage our fears?

The simple yet profound answer – feeling in control.

The most powerful way we can cope with fear or anxiety is to create a feeling of control

Anything that gives us a feeling of control over our situation helps us keep our calm. But when we don’t have a feeling of control we get stressed and start panicking.

Our prefrontal cortex in the brain is where we do all the “thinking”.  As long as we feel in control, we can use it.  When we feel out of control, we lose the ability to think from our prefrontal cortex.

Amy Arnsten studies the effects of limbic system arousal on prefrontal cortex functioning.  She summarized the importance of a sense of control for the brain during an interview filmed at her lab in Yale.

“The loss of prefrontal function (the thinking part of the brain) only occurs when we feel out of control. It’s the prefrontal cortex itself that is determining if we are in control or not. Even if we have the illusion that we are in control, our cognitive functions are preserved.”

This perception of being in control is a major driver of behavior.

Your Brain at Work by David Rock

So how do we bring in a feeling of control?

Let us check other fields which have the same problem and find out how they are solving it. This will give us some valuable clues.

Think of army men, bomb squad members, firemen, emergency ward doctors etc who are trained to make good decisions in extreme high pressure situations.

Let us study the most badass amongst them..

Enter the US Navy Seals..

The US Navy seals have handled threatening missions in the world’s most dangerous spots, whether that meant jumping out of airplanes, taking down hostile ships in the open sea, or rolling prisoners in the dead of night in the mountains of Afghanistan. As a Navy SEAL, they have learned how to manage the natural impulse to panic in the face of terrifying situations.

1.Prepare and Practice

 If you are wondering on how the Navy Seals are so fearless, the simple answer is they – Train, Train, Train!

“We spend 75% of our time preparing for deployment and about 25% on the deployment.” 

“It’s not like you jump out of a plane once and then you remember how to do it forever. It’s something you’ve got to constantly revisit. When you hang out in the mountains of Afghanistan, you don’t exactly get to work on your scuba diving.”

Former SEAL Commander James Walters

The SEALs learn to handle fear by practicing all possible high pressure situations well in advance repeatedly until they feel naturally confident about it—until that unknown becomes, well, a little more known. This provides them with a sense of control and confidence.

In the SEAL teams, this is called contingency planning.

What will we do if we hit a landmine?
What will we do if we take a casualty?
What will we do if the target house looks like it’s been abandoned?

Even NASA followed a similar strategy for their astronauts to make sure that astronauts wouldn’t panic in the early space missions. They ran them through every step of the process until it became boringly familiar. This level of familiarity produced a powerful feeling of control and confidence.

Before the first launch, NASA re-created the fateful day for the astronauts over and over, step by step, hundreds of times — from what they’d have for breakfast to the ride to the airfield. Slowly, in a graded series of “exposures.” the astronauts were introduced to every sight and sound of the experience of their firing into space. They did it so many times that it became as natural and familiar as breathing.

Obstacle is the Way by Ryan Holiday

Now, if you really think about it – almost everyone be it a surgeon, a fireman, a bomb squad member etc who is required to deal with decision making in high pressure situations inevitably goes through thorough preparation and training.

But when it comes to investing in equities, most of us enter completely oblivious to the power of our amygdala – unprepared and untrained to handle a bear market.

Even experienced investors have gone through their share of tough periods and most of them over years have evolved their ability to handle bear market mostly via trial and error and repeated exposure.

Usually a correction of 40-50% happens every 7-10 years while a 20-30% happens every 3-5 years. This means by the time we get prepared to handle a bear market via actual exposures it is almost 15-20 years. That is too long a training period.

So the question for all of us is –

How in the world do we train for a stock market correction?

While I don’t have the perfect solution yet (and I guess a lot more attention is desperately needed here), here is a good starting point to train for a market fall

  1. Reduce the no of decision making points – pre decide when you will actually make a decision
  2. Prepare a “What if things go wrong” plan – write down what you will do if your portfolio is down 20%,30%,40% and 50% (also think of the various declines in portfolio in Rs terms (vs % terms). A 10% fall, on a 1 lakh portfolio feels a lot different than on a 10 cr portfolio!)
  3. Reduce the frequency of monitoring your portfolio
  4. You can also refer my earlier posts on this topic for a detailed explanation

2. Long Term Goals as a sequence of short term goals

This was one among the most important techniques which the Navy Seals used to increase their passing rates during training.

To maintain a feeling of control, during an extremely stressful situation the Navy SEALs often thought about their friends, family, religious beliefs, and other important things from their lives. The key was to see something positive in the future (in the near future, if possible) that allows the mind to be distracted away from the current stress and uncertainty.

They also broke down their goals into micro goals, short-term goals, mid-term goals, and long-term goals.

Instead of thinking of completing the six month training course as one goal, they broke down the six months into weekly goals, daily goals, hourly goals, and even goals by the minute. 

Short-term micro goals coupled with longer-term goals was their strategy

We can apply the same strategy while investing.

Goal Based Investing is a practical way to implement the above concept where your investments are bucketed according to their purpose (goals) and when you will need a given amount.

The purpose of “why” we are investing is often forgotten during a falling market. It makes sense to remind our self of the original goal for which we are investing (to become financially free, start a new venture, fund kid’s education etc) and the actual planned time frame. This helps to get a holistic picture and distract ourselves from the temporary market fall.

Further, a micro focus on short term things under our control – continuing to invest one month at a time and sticking to our “what if things go wrong” plan after every 10% fall also helps to stick to our long term plan.

3.Stoic Philosophers to the rescue

In ancient Greece and Rome, many prominent thinkers & philosophers subscribed to a philosophy called Stoicism which is primarily about recognizing what you can and cannot control, in order to focus your energy exclusively on what you can actually control.

Source: https://dailystoic.com/premeditatio-malorum/

The ancient Stoic philosophers which includes the likes of Marcus Aurelius, Seneca, and Epictetus regularly conducted a strange exercise known as a Premeditatio Malorum, which translates to a “Premeditation of Evils.”

Now before you get scared, “Premeditation of evils” was simply a practice of taking a moment to think through everything that could go wrong with a particular plan and prepare for it.

This may sound extremely pessimistic and counter intuitive, but the Stoics believed that by imagining the worst case scenario ahead of time, they could overcome their fears of negative experiences, make better plans to prevent them and lessen the impact of the negative outcome if it ever translates.

While most people were focused on how they could achieve success, the Stoics also considered how they would manage failure.

What would things look like if everything went wrong tomorrow?

And what does this tell us about how we should prepare today?

Source: https://en.wikipedia.or/wiki/File:Samurai_with_sword.jpg

Even the Japanese Samurai warriors used to think about death a lot. Why? That way they wouldn’t fear it in battle.

One who is supposed to be a warrior considers it his foremost concern to keep death in mind at all times, every day and every night, from the morning of New Year’s Day through the night of New Year’s Eve.

The Code of the Samurai

Really thinking about just how awful things can be often has the ironic effect of making you realize they’re not that bad.

Here is an interesting story which I came across from a presentation by an amazing blogger called Jana Vembunarayanan.

This is what an experienced investor from India recent told me. He has been operating in the markets for 30+ years with a CAGR of 35%. During 2008-2009 his portfolio was down by 80%. Apart from his property he had most of his net worth invested in equities.

How did he sleep well at night?

He had the habit of mentally counting only 20% of his net worth.

This helped him a lot to stomach the drawdown.

https://janav.files.wordpress.com/2018/10/three-bucket-framework-to-investing.pd

This is a great way to think about your existing portfolio.

As equity investors, we will all have to experience a 40-50% drop in our equity portfolios at some point in time. 

What if we, like the ancient stoics mentally wrote off and counted only 50% of our existing equity portfolio.

What would things look like if this happens tomorrow?

What if the market never recovered – will we still be ok?

The answer to this will also decide our equity allocation.

Like the stoics and the experienced investor from India, practicing the habit of mentally writing down a part of the portfolio will help us be a lot more prepared and better positioned to handle the inevitable bear market.

Summing it up

Never underestimate the ability of the Amygdala to overrule your rational brain in times of panic. The key is to acknowledge and work along with it.

Here are few techniques we can learn from the Navy Seals, NASA, the Samurai warriors and the Stoics to handle a market fall without panicking

  • Plan and Pre-load your decisions for a falling market
  • Reduce the no of decision making points – pre decide when you will actually make a decision
  • Prepare a “What if things go wrong” plan – write down what you will do if your portfolio is down 20%,30%,40% and 50%
  • Reduce the frequency of monitoring your portfolio
  • Long Term Goals are a collection of short runs – combine the “why of investing” with the discipline of regularly investing one month at a time and sticking to the “what if things go wrong plan” for every 10% fall
  •  Practice mentally writing down a part of the portfolio

If you loved this post, do share it with your friends and don’t forget to subscribe to the blog via Email (1 weekly newsletter) or Twitter along with the 5000+ awesome people. Look out for some fresh, super interesting investment insights delivered straight to your inbox.

If in case you have any feedback or need any help regarding your investments or want me to write about something, feel free to get in touch at rarun86@gmail.com

You can also check out all my other articles here

Disclaimer: All blog posts are my personal views and do not reflect the views of my organization. I do not provide any investment advisory service via this blog. No content on this blog should be construed to be investment advice. You should consult a qualified financial advisor prior to making any actual investment or trading decisions. All information is a point of view, and is for educational and informational use only. The author accepts no liability for any interpretation of articles or comments on this blog being used for actual investments