Invest in What Doesn’t Make You Nervous

The?stock market?has taken us for a serious ride lately.?Investors are freaking out because they have no idea what to do.?Sound familiar??That’s because it is.?Seasoned investors who have been through cycle after cycle are totally used to this and most are simply “doing nothing” which has been a large mantra by many experts.?But what a lot of “experts” don’t tell you is that many of the people who do nothing usually have enough money to withstand downturns.?What if you’re 75 years old and 20% of your net worth gets wiped out in 2 weeks??It’s a scary feeling to say the least.?The problem with most financial advice during a downturn is that there isn’t a particular “general” piece of advice that works for everyone.?Sure, if you have $3 million in the market, are in your 40s and make a ton of money at your job, staying in the market makes complete sense because you don’t need that money any time soon.?But that’s simply not the profile of the average investor.?While I personally think that yes, you should generally leave your money alone during a downturn, that doesn’t mean I’m totally against doing other things.?But if there’s one piece of advice I would subscribe to, it’s this: invest in what doesn’t make you nervous.?In other words, if you are having trouble sleeping at night because of any investment, you need to seriously consider ditching or lowering that investment significantly.

“Invest in what you know” modified

One of the most common pieces of advice that investors have received for decades is “invest in what you know.”?In other words, if you decide you’re going to go the stock picking route instead of investing in an Index Fund, then you should seek out companies you are familiar with and whose businesses you understand.??Warren Buffett, perhaps the world’s most prolific investor of all-time has been heard numerous times after refusing to buy a certain stock or invest in a certain business say, “I don’t understand the business.”?If he doesn’t understand the business, he’s not going to invest in it, period. Do you have to take this piece of advice??Of course not.?How you invest is entirely up to you.?But if you want to actually make money investing and increase the odds of success, it’s certainly wise to give yourself an advantage.?And clearly having great knowledge of what you’re investing in should give you an advantage.?However, since investing is as psychological as it is intellectual and academic (most would argue it’s even more psychological than anything else), I don’t think that “invest in what you know” is enough.?I think “invest in what allows you to sleep at night” needs to be added to the equation.?You might know a ton about a company but if you’re investing on margin and are freaking out every night, it doesn’t matter how much you “know.” If your emotions are being torn every which way, and your mental health is being affected, that’s not good whether you win?or?lose.

What allows me to sleep at night

I’ll give you a perfect example of something I recently did in the midst of this downturn.?I owned 20 individual stocks prior to this recent downturn.?Let me also start by saying most of my stock investments are in the S&P 500 Index.?However, I’ve reserved about 35% of my stock portfolio to individual stock picks.?With the recent declines in the market I started freaking out a little bit.?I wasn’t freaking out because the market was declining (in fact I see that as a buying signal), but I was definitely freaking out because I owned too many stocks I just don’t have much conviction in.?Stocks where if they went down I wouldn’t think to myself “I should buy more” but rather “what the hell is going on?” So after a few days I decided to sell those 8 stocks that I just don’t feel much confidence in and will allocate that money to the remaining 12 stocks that I know more about and believe in.?Now if the market declines even more I won’t care nearly as much.?The funny thing is that if 100% of my money was in the S&P Index Fund I probably wouldn’t have even looked at my portfolio because I’m very comfortable with the notion that over time, the markets do rise despite ugly downturns.?Bottom line, I’m very comfortable losing money in the market pending I have a high degree of confidence it’s temporary.?And I have those high degrees of confidence when it comes to certain stocks and the overall market.?But I have zero confidence in things I don’t understand and when they’re volatile.

Constant adjustment – what keeps me up

I wish I was the guy who could sleep through a shit storm in the markets.?Sometimes I am, and sometimes I’m not.?The reality is the volatility is something I’ve never been comfortable with.?But that’s a good thing.?Because at least I know this and accept it.?I know that prices going 10% up and down by the day or week freak me out, therefore it’s best for me to stay away from these investments.?But more importantly, I know what kind of investments keep me up at night and those that allow me to sleep that nice sleep we all strive to get.?Some might think I’m crazy for sleeping at night having an investment in wine.?But you know what??I have a very small allocation to wine so it doesn’t bother me in the least.?Some might think I’m crazy trying to up my real estate allocation to over 50% of my investments.?Me??I don’t like volatility and I’ve always believed in real estate because hey, people will always need a place to live and the amount of land in the world will always be finite.?So no, 50% in real estate doesn’t phase me at all.?Some might think I’m crazy for spending $50,000 a month on my own business.?Me??I sleep like a baby.?But I’m also sure enough in myself to know that if my mind changes, so can my asset allocation and investment strategy.?This isn’t a constant straight line.?Investments are a living thing and they affect us in a myriad of ways.?It’s perfectly OK to adjust things from time to time if it makes you sleep better.

Parting words

Before you hit that buy or sell button on?any?investment, the first question you should be asking yourself is this: “will I sleep at night holding onto this investment?” If the answer is yes, sleep well until you don’t.?And if you don’t sleep well??That’s when you reassess.??Good luck.