People are terrible at self-regulation and self-awareness when it comes to eating.
One study asked people how much bread they ate after leaving an Italian restaurant. Nearly one-third of the diners couldn’t recall how much they had. And 12% of the people who ate bread denied having eaten any at all.
When asked how much food they consumed in a meal, people of average weight assume they’ve eaten 20% less than they actually did. People who are overweight underestimate how much they actually eat by anywhere from 30% to 50%.
Other studies show it can take up to 20 minutes for your body and brain to realize you are full.
It can be difficult to know when you’re full while investing too.
In a bear market it always feels too early to buy and too late to sell.
In a bull market it always feels too early to sell and too late to buy.
If you’re sitting on a pile of cash it can be nerve-wracking to put it to work in risk assets.
What if the market crashes right after you buy?
If you’re sitting on huge gains or losses in your holdings it can be confusing to know when to take some profits.
What if you sell too soon and miss out on the next Apple, Amazon or Nvidia?
What if you hold on too long and take part in the next Citigroup, Enron or Lehman Brothers?
The hard part about investing is no one knows the future.
No one makes the right decision at the perfect time with every investment. The only people who flawlessly time tops and bottoms are either lucky or lying.
So what’s the answer?
There are no easy answers. I prefer to place some guardrails on my decisions and portfolio. A few thoughts:
Successful investors are like bouncers.1 There are more investment options available to investors than ever before. It’s the best time ever to be an investor.
But the paradox of choice makes this a double-edged sword. It’s more important than ever to have filters in place to guide your actions.
You have to be a bouncer at the club holding the rope constantly turning investment options away that don’t make sense for your plan.
Jack White of the White Stripes once called this “the liberation of limiting yourself.”
Good decisions are made ahead of time. Gains and losses can have profound effects on your brain and body. Money causes fear, greed, stress and all kinds of emotions.
You don’t want to be making investment decisions when emotions are running hot.
I like making good decisions ahead of time and thinking in terms of an if/then framework to avoid making emotionally charged decisions at the worst possible times.
You need a plan in place to guide your actions.
Don’t be exclusively outcome-based. The market is the ultimate scoreboard. Price tells you who is right and who is wrong.
Eventually you have to be right to make money but I would rather rely on pre-mortems than post-mortems when judging investment decisions.
Everyone is wrong and no one makes the right moves at exactly the right time.
The best you can hope for is a reliable investment decision-making process you can follow come hell or high water.
Guardrails are important. The simplest way I’ve found to place guardrails on your portfolio is through wise asset allocation parameters.
Want to know how to deploy cash on the sidelines?
Have a pre-established mix of stocks, bonds, cash and other investments so you know where you’re over- or under-weight.
Want to know when to buy or sell a single stock position?
Have a minimum and maximum position size so you know when to take some profits and when to buy some more.
A reasonable asset allocation can’t ensure you make well-timed decisions but it does help you control risk based on your risk profile and time horizon.
I had a really fun conversation with Jill Schlesinger for Jill on Money where we talked about how to place some common sense guardrails on your portfolio:
We also talked about my career path to Ritholtz Wealth, some year-end investment tips, when to sell, my hobbies outside of work and more.
Further Reading:
The Liberation of Limiting Yourself
1I stole this analogy from Josh. Credit where credit is due.
