Gut Check



Forget the hodlers and the BTFD crowd and the so-called crypto experts: Days like today exist as wonderful reminders as to why we hold basic investing principles. It is a good time to ask yourself seven basic questions as to what you are and are not doing, and why.

1. How much market history do you know? 

Markets go down 5, 10, even 20% as a regular occurrence; so too do individual stocks (and crypto coins) slide 40, 50 even 60%. These occasional spasmodic events occur with a frequency that seems to alarm some. This is a feature, not a bug. Regular drawdowns occur because if they didn’t, it would make investing too easy. Imagine a world where stocks only went up smoothly and quietly. How could that possibly happen? It cannot, and so it does not.

Anticipating these drawdowns in advance serves two purposes: First, recognizing these as inevitable events lets you prepare emotionally for their occurrences; second, it urges you towards constructing more resilient portfolios.

2. Can you maintain discipline over your emotions?

Crashes occur all too frequently. What matters is your ability to manage those emotions. This is much easier in theory than in real life: To quote Bill Bernstein, “You succeed in finance to the extent that you can suppress the limbic system, your system one, which is the very fast-moving emotional system that we have. If you can’t suppress that, you’re probably going to die poor.” Days like today test your discipline — and it is still (potentially) very early in the downturn. Even the most disciplined investors were tested in the 2008-09 crash.

3. Why do you own what you own?  And why that much? 

If you own a speculative amount of crypto, today is painful but survivable. If you mortgaged the house, you may soon be homeless.

I have reviewed countless portfolios over the years, and I am often surprised by what and how much is in them. Half the time, the answer to What’s this? is a shrug and an “I don’t remember;” often, it reveals a brother-in-law’s recommendation or someone on TV who made a compelling case, or an admired manager who said nice things about the company.

Why are you still holding these? Review your assets regularly to eliminate that which does not belong.

4. Do you understand the difference between speculation and investing?

Is this a long-term investment or a trade? Is this an asset class that you can comfortably hold onto and rebalance, or is this something more volatile requiring trade management or even hedging? I have no beef with the more speculative and pricey positions — Tesla or Bitcoin or whatever — so long as you understand what they are and know how to manage them.

5. What is your (trading) plan?

Speaking of which: Whether it is for your fun Robin Hood trading account or that lucky stock pick that expanded into a concentrated and valuable holding, what is your plan? How are you going to manage the occasional ups but especially the downs?

Every accumulation of wealth includes a risk of loss, and without a plan to manage that, you are setting yourself up for disaster.

6. Why are you invested in markets?  

This is less obvious than it may appear. If your answer is “because stocks go up over the long-term” you may be investing without purpose. Your answer should involve more than the word “more.”

My personal answer has three components: retirement, next generation, & philanthropy.

7. What is your (financial) plan? 

I keep advocating to have a plan; Some people listen, some don’t. Regardless, I will continue to advocate a plan as invaluable — especially on days like today.

None of these questions are hard to answer, but you should consider them all. If you find yourself struggling to come up with decent responses to these questions, then you have a problem. Put the requisite work into your portfolios (or find someone to do it for you).


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