Less Stress, More Money
Our brains weren’t designed for the complexities of trading or investing.
We evolved to handle more straightforward tasks like hunting, farming, building, and raising children.
As a result, navigating today’s investing environment can be overwhelming for our minds.
Now, we can trade almost any asset instantly and without fees. For a cost, leverage via margin or options is also available. This technological progress is impressive but carries significant risks.
In such a setting, our minds often become our biggest obstacle.
One major issue is our tendency to fixate on losses. Even when portfolios are growing overall, a decline from a peak grabs our attention more than the broader upward trend.
When our portfolio hits a new high, our brains mark it as the updated measure of our wealth.
If that value drops, our minds scramble to figure out how to recover it. It’s crucial to accept that errors are unavoidable and perfect market timing is unattainable.
Today, we’ll explore ways to reprogram our thinking to boost earnings with less anxiety.
Separate ‘Trading’ from ‘Investing’
Many people confuse trading with investing, using the terms as if they mean the same thing. That’s a mistake.
Investing focuses on long-term goals, while trading deals with short-term moves.
My firm conviction is that the bulk of an investor’s portfolio should be allocated to assets held for multiple years, ideally longer.
This approach makes sense because market timing is extremely challenging, and our brains struggle with volatility. Trading driven by emotions often leads to buying high and selling low — a typical human behavioral pattern.
To combat this, we must deliberately counteract these impulses. The simplest method is adopting a buy-and-hold strategy for most of our investments.
Long-term investing also tends to be more tax efficient, as we discussed recently.
This doesn’t rule out trading altogether. I keep a small portion of my portfolio for short-term trades, mainly involving options.
If impulsive trading is a problem for you, it’s wise to maintain separate accounts: one for long-term holdings and another dedicated solely to trading and options strategies.
This separation simplifies monitoring each approach’s results and making necessary adjustments.
Ignore the Joneses
Our minds also tend to watch and mimic others chasing big profits—this pattern underlies every asset bubble in history.
One key way our brain can mislead us is by hearing stories of massive gains and trying to replicate them.
Examples include dotcom stocks in 1999, booming housing in 2007, and today’s popular U.S. stocks. While it’s possible to profit from bubbles, it’s vital to fully understand the risks and avoid reckless behavior.
For instance, my father-in-law served in the Secret Service for 30 years. In the late 1990s, he heard about the tech wealth around him and jumped in near the peak in 1999. He invested heavily with leverage into the hottest stocks.
He suffered such losses that he never invested in stocks again, relying on CDs at record low interest rates instead.
His errors included overusing leverage and lacking diversification. If he had also held an S&P 500 index fund, gold, and international equities, the losses would have been more manageable. He could have remained in the market for decades and grown his wealth substantially.
But attracted by peers’ gains, he chased returns and got burned. After the bubble burst, the experience traumatised him and he missed out on more than 20 years of market gains.
Mission: Stay Invested, Smartly
As investors, our main responsibility is to allocate funds to stocks and sectors with strong long-term prospects. Right now, I favor precious metals, mining stocks, and undervalued emerging markets such as Brazil. I also maintain exposure to U.S. stocks via retirement accounts and some venture capital positions.
Diversification remains critical, which for me involves a mix of alternative assets like gold, silver, natural resource shares, and emerging market investments. Many of us already carry substantial U.S. economic exposure through our jobs, retirement funds, and homes.
I consider trading a secondary focus, reserving a portion of my portfolio for high-risk, high-reward opportunities. Unless you’re a seasoned trader, it’s smart to seek advice from professionals like those at Paradigm.
The key to success in investing and trading is to suppress your brain’s instinctive reactions. Avoid letting emotions dictate decisions. This usually leads to poor outcomes.
For the long-term portion of your portfolio, pick assets you’re comfortable holding for 5-10 years. Creating a plan and sticking with it is crucial to becoming a successful investor. Constantly shifting your entire portfolio reduces your chances of achieving solid long-term returns.
Develop a strong investment thesis and remain disciplined. Doing so puts you ahead of most investors (and traders!).
About the Author
