Markets go Up and They go Down | 6 Principles to Cope

800px-The_long_and_winding_roadPeople worry when markets are near the top (“Is this a bubble?). People worry when markets are lower than they were (“Is this a crash?”).

Here are some guidelines to keep you “on the road” even while the markets are twisting and turning – which they always will!

1) Revisit or develop your Investment Policy Statement (IPS).

An IPS describes procedures, investment philosophy, investment style, guidelines and constraints with which your investments are managed, either by you or your adviser. An IPS serves as your guard rails so you don’t veer all over, chasing investments or changing your strategy, as the markets change.*

2) Invest in indexes.

The odds of all the companies going to zero at the same time in an index are slim. The odds of one, or a few companies, going to zero at the same time is greater. You may reduce your worries about losing your money – although value still goes up and down – the purpose for this blog – how to get comfortable with changing values, AND how to dial in your exposure to those changes.

3) Invest in more than one index.

This is the concept of diversification and asset allocation (these are two different things – explained here).

4) Forget about predicting the future.

Saying one thing might happen is lucky. One or two data points isn’t proof. Saying 10 things are going to happen and being right – that’s prediction. Nobody has done that about the markets yet. Adopt a non-prediction based approach to investing because the costs of being wrong may be huge.

5) Develop a prudent plan and processes that are structured, with decision rules in place to guide you, and that already consider markets that always go up and down.

Expecting things to always go up is unrealistic. Prudence realizes this and lives with it. The degree of ups and downs you experience may be dialed in based on your tolerance and capacity for risk.

6) Customize your portfolio to you based on the principles above and specific to you and your situation.

Water cooler” investing is structuring your affairs based on someone else’s situation and needs, not yours. Worse, this leads to chasing what is hot, rather than was is prudent for you.

The 6 principles, when combined, should provide you some comfort during any market.


* How to rebalance your retirement portfolio – Robert Powells Retirement Portfolio – MarketWatch. and a brief discussion on rebalancing here too.


Photo source: By Leo-setäCamera location32° 48′ 45.70″ N, 17° 4′ 20.80″ WView this and other nearby images on:Google Maps – Google Earth – OpenStreetMap(Info)32.812694444444;-17.072444444444 [CC-BY-2.0], via Wikimedia Commons



, , , , , , , , ,

No comments yet.

Leave a Reply