The Life Cycle of an Investor
Understanding the Psychological Journey of Investing
INTRO
We talk a lot about asset allocation. What is a winning mix of assets that will yield the best risk-adjusted returns? That sounds like a complex question, especially when we are just starting out as an investor.
I’ll share my journey to crystallize some concepts. We’ll walk through the stages of life through an investing lens in hopes we can all become smarter risk managers.
There are no right answers, it is more about learning and understand the risks we are taking.
STAGE 1: THE GAMBLER
THE SET-UP: younger and just getting started with the ““markets””.
THE MOOD: let’s have some fun and gamble! All risk and all stocks and no understanding of any of the above.
THE PORTFOLIO: often heavily concentrated in one (initial) position.
THE RISK: best defined as a speculator with a single out-sized position.
STAGE 2: 60/40 TIME
THE SET-UP: we build some savings and some knowledge and learn about diversification and bonds.
THE MOOD: bonds seem too boring and for old people.
THE PORTFOLIO: we buy more stocks…and options.
THE RISK: still out there on the risk curve. Maybe a few more positions, but still uninterested in diversification…and bonds.
STAGE 3: A MULTI-ASSET PLAYER
THE SET-UP: we learn and have access to more alternatives.
THE MOOD: it makes sense to spread it around the infield.
THE PORTFOLIO: we start to sprinkle in other assets and asset classes and round-out the portfolio.
THE RISK: portfolio risk is better diversified, but still more focused on positions.
STAGE 4: “SMART” RISK
THE SET-UP: with a focus on risk and a student of the markets, we’ve rounded out the portfolio to the best of our ability.
THE MOOD: spent 20 years learning this stuff; may as well try to apply it. Reaching for alignment between my beliefs and my portfolio.
THE PORTFOLIO: trying to mirror our Multi-Asset portfolio.
THE RISK: there is always risk. The key is the find and understand the bigger risks and determine if there are interesting hedging alternatives and/or speculative bets.
THE CLOSE
There are no right answers, so this is more a reminder to know and understand the risks we are taking. Many can get to second-base on the analysis above (the 60/40 stage), and our goal is to help you get to third base and home. The key to winning is to not lose…big. Take the big out-sized risk off the table, if at all possible. Or to keep things in our baseball parlance, the play to avoid - with two strikes you square-up to bunt, and it goes foul…off your toe.
Disclaimer: The information contained in this article is for informational purposes only and should not be considered as investment advice. The information presented in this article should not be interpreted as a recommendation to buy, sell or hold any security or investment. Before making any investment decisions, it is important to do your own research and seek advice from a qualified professional. Investing in securities and other financial instruments carries a high level of risk and may not be suitable for all investors.