Investors: Know What You Control

Returns. Index topping, portfolio defining, Ferrari buying, returns.

Anyone investing in anything expects a positive return on their capital, only a fool would put money somewhere when negative returns are the intended outcome. It’s incorrect though to focus solely on the returns–they are the only piece of the puzzle you can’t control and are therefore the one you should pay the least attention too. Consuming your time with how your portfolio is doing is counterintuitive, it will pull your attention away from researching potential investments and inevitably lead to poor portfolio performance. You need to focus on maintaining a proper balance of risk, opportunity, and exposure, as these will allow for time to progress in your favor and returns to mount.

Returns, profits to be more exact, aren’t anything more than a byproduct of proper investing. In the investment world, there are few things you control, however, those which you can are good determinants of your annualized outcome.

Here’s what you can control:

1. Risk/Exposure

You are in full control of how exposed you make yourself to different sectors and are therefore fully capable of building a portfolio to meet your needs. If you’re a relatively risk-averse person, don’t go dumping your money into over-volatile industries. Have an understanding of what you’re able to stomach and then buy/diversify accordingly. It’s fun to stay centralized when the markets are on the upside, but dealing with losses day-after-day because you’re relying on one industry isn’t easy to do.

2. Cost

How much money you spend, or tie-up for lack of a better word, in the security markets is completely on your shoulders. If you know that you can afford to leave a few thousand/hundred thousand in the markets for an extended period of time then do so, but don’t get a second mortgage on the house or lock up your student loans. As Keynes put it, markets can remain irrational far longer than you or I can remain solvent, and panic selling on downturns will never help your results. Invest what you can and learn to make good decisions. Over time, your knowledge will improve and your account balance will follow.

3. Time

You know your time horizon better than anyone else, and it is one of the most important factors when it comes to generating growth. If you’re 20 years old, you have more than double the amount of time you’ve been alive to let assets grow freely. There is no rush, and there is definitely no silver bullet–find some good investments and let them do their thing. If you can’t tell me the difference between someone who buys at $10 and sells at $40, and someone who buys at $10, sells at $14, buys at $17, sells at $22, buys at $25, and sells at $31, then you have no business investing.

Additionally, time also applies to the amount of time your willing to put into investing. If you are willing to spend hours learning, reading and developing ideas regarding companies/industries than you can expect good results. Although luck & timing play a factor, your chances of success are significantly increased. If you invest in a company because Jim Cramer said i’ts a buy don’t put through the order for your yacht just yet.

4. Behaviour/Expectations

Being able to control your behavior over time and setting reasonable expectations are far more valuable than you can imagine. Your behavior in both market turbulence and prosperity will define your success, you need to remain cool-headed and think on more than just a day-to-day basis. Reading books about others experiences will help set you up for success in this regard, as its far easier – and cheaper – to learn from the mistakes of others. Similarly, you can’t enter the market with $10k and expect your portfolio to be worth $100,000 in a year. People have done it, but far greater numbers have failed in their pursuit, the risks that need to be taken are completely unreasonable. Compounding is a beautiful thing, as time passes you’ll see it work its magic.

Here’s what you can’t control:

Everything else.

Here’s a chart I made in 3 minutes on Excel to illustrate my point:


Obviously, the inverse relationship is made using completely random numbers, however, the inverse relationship itself is the point I’m trying to make. Don’t completely disregard how you’re performing, as you surely need a way to determine whether or not your decisions are working out. Just don’t get consumed by it. You need to find a healthy balance between knowing where you stand and focusing on the next steps.

Spend your time advancing the things which affect your outcome as opposed to the outcome itself. Rather than wondering why your past-years performance is sub-par ask how you’ve been managing your risk, how exposed you are to certain industries, how much homework you’ve been doing on the companies you’re investing in. You can’t win the big game if you spend the entire second half staring at the scoreboard.

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