I started investing in index funds in 2011 after reading I Will Teach You To Be Rich by Ramit Sethi.
Ramit explained that a good index portfolio had to have both stocks and bonds, and that while stocks had higher volatility over the long term, they also grew more, so when I had to decide my percentages I didn’t hesitate for a second and opted for 90. % shares (the maximum recommended) and 10% bonuses.
After all, if I could choose between an asset that was going to give me an average return of 10% per year and another that was only going to give me 5-6%… why wouldn’t I invest as much as possible in the first?
I was young, I had a good job, and I wasn’t going to need that money for another 30 or 40 years.
Therefore, the fact that this higher return was accompanied by greater volatility was not a problem for me.
The only thing that mattered was that the return on my portfolio was the higher the better. Everything else didn’t matter.
For many years this has been my investment philosophy:
A portfolio with the maximum percentage of shares possible and reduce expenses to a minimum to maximize profits.
Hence, I have always recommended the same thing in my articles:
- A percentage of shares of “110 – your age”, or even 90% if you did not plan to touch that capital in at least 10 years
- Do it all manually through a commission-free broker like MyInvestor, so as not to incur any type of additional cost
It did not enter my head that someone – especially someone in their 20s or 30s – would voluntarily decide to reduce their potential earnings by opting for a more conservative portfolio, with 40% bonds, for example.
Or even worse: that you decide to pay an additional 0.4 or 0.5% commission for investing in those same funds through a roboadvisor like Indexa Capital, knowing that scheduling regular contributions in MyInvestor and rebalancing your portfolio from time to time was so simple (in this post I explain step by step how to do it, so you can see how easy it is).
However, in the last two years I have changed my mind.
After suffering the economic crisis in my own business and having to lay off the entire team this summer; after seeing how many of my sources of income were reduced or even disappeared; and after seeing how a part of the benefits of my investments vanished in recent months with the declines in the stock market…
I have realized that the potential performance of your portfolio is important, but that the psychological part is much more so.
On paper everything seems very simple:
“I invest €5,000 a month for a while, my capital grows at 10% per year, and in 15 years I am retired. What during the process the bag goes down 30%? Well better, so I buy on sale when all weak minds are selling in panic. Ha ha ha (evil laugh)”
The problem is that in the real world things are much more complex.
First of all, most likely your income and expenses will not remain stable throughout your life, but you will have to deal with personal situations that change your plans: a layoff at work, a bad run in business , a divorce, the purchase of a home, an illness, the birth of a child…
Secondly, your net worth will not always go up, as in the typical Excel simulation.
As a long-term investor, your investments are going to suffer regular drops, some of them quite significant and for a long time, and it is not the same to see -30% in a graph of the stock market history -in which it also looks like a few years later everything picks up– than seeing it in your broker’s account, especially when all the people around you are talking about resignation and that the world is going to end (which is usually the climate you breathe when the stock market drops 30%).
We are human beings, not robots, and when you have significant amounts invested and that -30% is equivalent to several years of savings accumulated with the sweat of your brow, it usually affects you. And if on top of that you get together with more problems on a personal and/or professional level, well, even more so.
And it is precisely in those moments, when you see everything black and emotions are running high, that it is easy to panic and make mistakes.
For example, in the interview with Antonio Rico that I published last week, I told how, despite the fact that I have a comfortable economic situation, that I have been investing since 2011, and that my investments have given me more than 7% per year on average Despite recent downturns… this past July I had a weak moment and deviated from my plan.
The continuous declines in the markets during the first half of the year, added to the situation of my business and the catastrophic news that I was hearing everywhere, made me overwhelmed and one day at 1 in the morning I transferred an important part of the funds that I had in my portfolio 90/10 to a more conservative fund like Baelo Patrimonio.
And I insist: it was totally irrational.
I did it despite the fact that I didn’t need that money at all, that I knew full well that this slump was only temporary, and that this particular part of my portfolio was +40% up despite the falls.
The idea simply got into my head that if I didn’t react I was going to lose that 40% profit that had taken me so long to achieve and I did the operation.
Of course: it goes without saying that a few days after this event the stocks rebounded and my portfolio, now having a lower percentage of equities, recovered less than it had fallen at the time 🤷♂️
But well, in my favor I must also say that it could have been much worse.
And it is that in the world of investment a single mistake can make you lose years of progress.
For example, imagine that in March 2020, after the stock markets plummeted due to COVID, you had sold all your positions for fear that the markets would fall even more, and that you would have bought back those same positions 3 months later, after to see that the pandemic was not such a big deal and that with the arrival of the vaccines everything was going to recover.
That decision alone would have made you lose 25% of your capital in a 90/10 portfolio. In addition to slowing down the effect of compound interest on your investments and generating an immense feeling of guilt for having messed it up.
For this reason, I now believe that when choosing your investment strategy, it is more important to sleep well at night and not make mistakes than to maximize the expected return.
Obviously profitability continues to matter, we are not going to fool ourselves.
But I think that it is preferable to earn a little less, live relaxed and know that whatever happens you will be able to continue with your plan… than to choose an overly aggressive strategy, always be stressed and end up selling at the worst moment and pulling for the worst. embroiders all the gains.
So if choosing a more conservative portfolio with less volatility is going to help you stay calm in difficult times…
Or if investing in an author fund or investing in index funds through Indexa will give you peace of mind, because it will allow you to ignore 100% and never look at your portfolio, or because you feel that the newsletter sent by the fund manager or the roboadvisor They help you feel supported and do not deviate from your strategy…
So I think it’s more than justified to settle for a slightly lower return.
The same thing happens with diets:
It is better to adopt a sustainable eating style, with which you “only” lose 1kg a month but that you can maintain without problems for the rest of your life…
…than going on a super strict diet to lose 2kg a month, but with which you are always a little hungry and in a bad mood, and then when the holidays arrive you recover what you lost because since you have accumulated so many cravings to eat “forbidden foods ” every day you go blind at the hotel buffet.
In the end, my conclusion after more than 10 years in the markets is that investing is not just about numbers, but above all about feelings and emotions.
Therefore, I think that we should always prioritize this aspect when deciding what we do with our money, because in the long term it is what will determine the returns we obtain, and because as Antonio Rico always says:
“Feeling good is part of success as an investor”
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