Let me start today’s post with a little personal confession.
Back in March, I completed our family’s latest net worth update.
A big takeaway coming out of the exercise was that our cash holdings were significantly higher than I would have liked.
There’s a good reason for it. I am currently on the hunt for our next property investment, which means I need to keep a decent chunk of cash on hand.
However, having run the numbers, I figured out that I could probably rebalance our asset allocation a little bit without sacrificing the ability to buy a property if and when a good deal came up.
And so, I proceeded to put about £120k (about $150k US, give or take) of cash to work in the stock market.
To be precise, I bought £80k worth of VUAG over the course of March – and then maxed out our ISAs to the tune of another £40k on April 8th, taking advantage of the allowance for the 2022 / 2023 tax year.
Of course, I don’t have to tell you about the carnage that has transpired in the stock market ever since. But in case you do want a reminder, this graph will do nicely:
I haven’t run the exact numbers, but my ballpark estimate is that I’m down about 8% on that £120k. A cool ten grand.
Our total losses are obviously much, much higher. I haven’t checked recently, but our equity portfolio has got to be down by a very significant six-figure amount.
Now, this isn’t nearly as bad as losing 17% of my entire net worth in just two weeks back in April 2011.
Equally, I’d be lying to you if I said it doesn’t sting.
However, when it comes to investing (and life), it’s not about the stings. They are pretty much guaranteed.
What’s more important is how you deal with the stings when they do happen.
The Big Zoom
One mental trick I often employ at times of market volatility is envisaging where the stock market might be in the future.
Some simple math tells me that assuming an 8% nominal return, the S&P 500 will stand at roughly 19,400 in 20 years’ time.
At that point in time, it will be utterly immaterial whether you put your money to work when the S&P 500 was at 4,500 vs. 4,150.
To be precise, the difference in annualized returns will be about 40 basis points (8% vs 7.6%).
Wait, some of you investment purists might say. 40bps annualized is a LOT of money!
But let me ask you this:
Where is the guarantee that you would have invested exactly at the bottom?
Do you really think you would have bought precisely at the market close last Friday, when the index declined by almost 4%?
Or around 7 pm on Monday, when the index dipped to about 4,090, before ultimately rallying late into the close?
It’s been proven over and over again that timing the market, repeatedly, is a futile exercise.
Even if you do get it right once or a few times, there is no way you will ever nail all the twists and turns over multiple decades.
And so, when it comes to investing, a good habit will ALWAYS beat hanging around the hoop, hoping for a lucky shot.
Skill vs. Luck
Those of you who play poker know that a starting hand of pocket (i.e. a pair) of aces is as good as it gets.
On the other end of the spectrum, you’ve got the 2-7 off suit as the absolute worst possible starting hand.
The best poker players know that if you get pocket aces, you should be aggressive, and if you get a 2-7, you should probably cut your losses and fold.
(They also know the probabilities for all the other 167 starting hands and play them appropriately)
But the MOST IMPORTANT thing they know is that pocket aces do not guarantee a win. In fact, the “win percentage” is 85% – impressive, but far from a sure thing.
And so, what really differentiates successful poker players from everyone else are three things:
#1: Doubling down when the odds are in your favour
#2: Recognizing that you may still lose
#3: Playing the game over and over and over again
Put differently, you could end up with a situation where a 2-7 beats pocket aces. It’s an absolute heartbreak when it happens, but it happens:
But the fact that these situations can and do happen does not mean you should stop playing poker altogether.
And it certainly does not mean you should start dismissing your pocket aces and going all-in on 2-7s every time.
You know what the value-maximizing strategy is over the long run. Sticking with it over a long period of time is the key to success – in poker and beyond.
In stock market investing, putting your money to work early and often is the equivalent of playing pocket aces over and over again.
Over the long run, you are guaranteed to end up far, far ahead:
Sitting on cash, on the other hand, is kind of like playing the 2-7s. In some extremely rare situations, you could end up ahead. But over the long run, you will lose – and lose BADLY.
To wrap up this post, I will ask you to close your eyes and imagine it is now May 2032.
Spring is finally here. Sun is shining, birds are chirping, and some folks are preparing to retire early – or simply cash in some of their portfolio for whatever it is their heart desires.
Now ask yourself – are these the people that sat in cash for the past 10 years?
Are they the ones who tried (and failed) to time the market, over and over again?
Or are they the ones who put their money to work through thick and thin, capturing the inevitable upside?
The choice is yours – but I certainly know which camp I would like my readers to be in.
As always, thank you for reading – and happy investing!
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
Find out more about me and this blog here.
If you are new to investing, here is a good place to start.
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