Line in the sand

My Mum likes to have a regular look at her investments and see how they are doing. 'You just like counting your money' said my Dad, (as if he doesn't like counting his money)....

'Why do you look at your account?' I asked. 'Because I like to see that it is going up' she replied. 'Would you sell your investments if they went down'? 'Nope, well, maybe if they went down a lot....'

This conversation illustrates for me the benefits of having an investment plan. Of course, we all like to see our investments go up in value, but, in my opinion, we need to have a plan (ideally a written one) about what to do, if anything, if they go down in value, because at some point they will! I completely get the idea of buy-and-hold investing, and for many of us that is the best way to go, because otherwise many of us would (and do), liquidate an investment at exactly the wrong time, ie at the bottom of the dip.

The strategy that I use with this portfolio is to have a 'line-in-the-sand' point at which I will sell the investment and convert it to cash if it is dropping in value. Many investors use a 200 day moving average for this. I use a 1 year moving average. It probably doesn't matter too much what I use, as long as I use it!

I use the 'line in the sand' to automate my decision-making about either being in or out of an asset-class. It is a binary decision making tool. There is no discretion involved. The reason for this is that I have emotional thoughts about how well or badly certain asset classes are going to perform. The trouble is, these thoughts are usually wrong. I have had numerous discussions in recent years with folk who feel that shares (equities) are over-valued and therefore better not to own them. They may be over-valued, but they have been going up in value for the past few years, and have been worth owning. I will sell my equity investment when they drop below the 'line in the sand'.

If you would like to know my current opinion about the state of the five different asset classes that I trade, have a look at my video:

[arve url="" /]


Popular Posts