I recently wrote about how to build a strong point of view. I used a few examples – one of which was investing.
Here’s what I said:
A good example of this, is my own investing strategy. I used to only invest in passive index funds. Over the last year or so I’ve been listening to people who are taking more risk. I’ve experimented a bit in this space and have decided I want to take on a bit more risk.
So, I’m transitioning to investing 80% in indexes and 20% in a handful of public companies with a long-term view. The foundations of my point of view are still there (I’m still mostly investing in indexes). But, how much risk I’m willing to take has changed and this ended up shifting my point of view and strategy for how I invest.
I ended up taking this a step further and re-allocating as:
- Indexes – 70%
- Specific public companies – 17%
- Cryptocurrency – 13%
Five months in, I’ve decided to mostly revert back to how I was before.
Why? Two main reasons..
Firstly, the specific public companies basket has significantly under-performed the market in the last five months:
- S&P 500: +12.34%
- Specific public companies: +5.05%
Now, it’s only five months and I should allow a longer time to compare performance. However, one of the reasons I went for passive index funds in the first place was because the data tells us that over 85% of actively managed funds underperform the S&P 500. When I look at my specific public companies basket, it’s one or two poorly performing stocks that are pulling the entire performance down. This highlights the power of diversification (i.e owning an S&P 500 index fund). It also puts into perspective the challenge of trying to beat the market.
Secondly, the specific companies basket is distracting. Ideally I would rarely look at it, but I’m finding that very hard. Now that I have a goal to beat the market, I find myself comparing against it regularly. Also, I have a gut feeling that trying to beat the market is a flawed strategy (because of the first reason). I therefore find myself worrying about my decision to try and do that. Overall, I’ve managed to bring a whole new emotional factor into play, which you don’t get with passive index investing.
The exception is cryptocurrency. I think about it differently to the specific public companies basket. I feel like there’s a once in a lifetime opportunity to get returns that far exceed the market. Therefore it feels much more speculative. It might very well lose half or even most of its value. That’s a risk I’ve come to terms with and it changes how I think about it, and how often I check it.
So, I’m switching to:
- Indexes – 87%
- Cryptocurrency – 13%
This makes me feel much better.
Even though I’ve gone back and forth a bit, it was a useful exercise. It reminded me that even when you have a pretty solid point of view around something, you need to stay open minded and curious. You need to experiment and evolve. Sometimes that will refine your point of view, or perhaps even take you in a different direction. And other times, you might find yourself reverting back – which is still useful as a learning experience. Importantly, if you don’t take those chances, you just get stale.