There are two times in a man’s life when he should not speculate: when he can’t afford it, and when he can. – Mark Twain.
The most important investment decision you will probably ever make concerns the balancing of asset categories (stocks, bonds, real estate, money-market securities, and so on) at different stage of your life.
In a long term, history tells us that the stocks averages return of around 11.2 percent per annum, which is way above the return on any other assets class. If you are in your 20s or 30s, it seems no-brainer to hold anything but stocks at all time.
Should you invest 100% of your investment in stocks?
Should you borrow money at less than 11.2 % (average market return) and invest in index for a long time and earn the difference?
Let me make it simple for individual investors like myself. The straight answer to the above questions is ‘NO’. And, yes, it does not make sense if you think short term. If you intend to invest for a long time like 20+ years and want to beat the market, you should not. You don’t believe me; just ask Warren Buffett or Charlie Munger.
In a long term, going all in and/or using margin to buy stocks are counterproductive because of the unpredictable nature of the market. The only investors who have the gut to buy good businesses when their stock price go down beat the market. And the only investors who can do that are the ones who have firing power in reserve. A lot of reserve to buy value stocks, the better the performance!
Stock go up and down; sometime way up and way down. Mr market is sometime overexcite and sometime over-depressed. Like-
- The Tulip-bulp craze (1593)
- The south sea bubble (1711)
- Biotech Bubble (1980)
- Tech Bubble (2000)
- Housing Crisis (2008)
- Recessions and Depressions.
- +/- 10% almost every year
All of these events create opportunities to the ones who are prepared. You are not prepared if you are fully invested and much worse if you are over invested.
Mark Twain summed it up for us.
October. This is one of the peculiarly dangerous months to speculate in stocks in. The others are July, January, September, April, November, May, March, June, December, August and February.
Amazon, one of the very successful stocks of all time in terms of performance was down 99% in 2001. Lets imagine you are in year 2000 and you know exactly how the future will hold in year 2019 for Amazon stock. Would you borrow money in interest to buy amazon stock?
In investing money, the amount of interest you want should depend on whether you want to eat well or sleep well. – J Kenfield Morley.
I can’t stress enough to be more conservative while investing. Get a better sleep. Apparently, that is the goal of financial freedom. This is the way to beat the market. Berkshire Hathaway has $129 billions in cash and marketable securities. Warren and Charlie are no dumb to be left out of the historic bull market.
The opportunity cost is way high than the fear of missing out. Suppress your emotions and make those brain cells work. When we are offered a margin loan with a 4.5% APR, we feel proud to see our cash reserves go up and up.
Are you firing power loaded?
The Dow Jones hit the new high of $28,000 yesterday and trades at above average of 20 times the Earning. Don’t get me wrong, the Dow Jones will keep going up and up. Pretty soon it will hit $100,000. I am positive about that, but it will swing wild before it hit that mark.
Are you prepared to grab that opportunity? Are you prepared for the worst case? Because anything that can go wrong will go wrong!