Investing is a stressful endeavor – plain and simple. You never have all the facts to make a perfect decision. You are only able to see the right answer with the benefit of hindsight. Things are always slow on the way up and frenetic on the way down. This all leads to emotions taking their toll on every single one of us.
One of the rules I have developed over the course of my investment career to cope with this stress is to always make changes in incremental steps. That means any buys or sells are accomplished through smaller adjustments, rather than large sweeping changes. I prefer this method for several reasons:
- You maintain a much greater correlation in your portfolio to the broad market or a specific benchmark with smaller steps.
- You can still accomplish strategic shifts in asset allocation or direction without upsetting the entire apple cart.
- Allowing a measure of time to pass between trades allows you to verify that your thesis is correct or adjust your strategy accordingly.
- You reduce the anxiety that comes with large position sizes directed towards a specific outcome.
The use of transaction-free mutual funds or ETFs to aid this process makes for a very efficient transmission vehicle with the lowest possible costs. Almost all the major brokerage platforms have excellent curated lists of funds to use as diversified core positions without any expense to trade.
These tools can be used to scale in or out of the market based on prevailing conditions or simply just re-balanced on a dependable schedule to your preferred exposure targets. I have also found it to be an excellent way for investors who are all-cash to make their first forays into stocks and bonds. They can average into a suitable cost basis by using time and price to their advantage.
There are also some obvious downsides to this trading strategy as well. If you purchase a small quantity of something and it runs away from you, then you always wish you would have been a buyer in greater size. That’s one of the psychological demons that plague active investors. Nevertheless, you can be comforted with the knowledge that you were indeed correct and could at least partially participate in the opportunity. The same risk dynamics play out as the market is falling as well.
The mentality of clearing the decks when you think the market is going to crash or going “all in” on what you perceive to be a big opportunity are alluring concepts. They feed our desire to call turning points or protect capital when fear is most prevalent. However, these same impulses are often flawed in their timing because of the overwhelming odds stacked against perfect execution.
Fear and greed are powerful motivators that often lead to regret with the benefit of hindsight.
When in doubt, take things slow and focus on factors that are in your control – i.e. security selection, costs, and position size. A little dose of humility goes a long way as well.
Disclosure: FMD Capital Management, its executives, and/or its clients June hold positions in the ETFs, mutual funds or any investment asset mentioned in this article. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.