A Different Kind of Balance In Your Portfolio

Boredom leads to bad decisions. Some people like change. Maybe like is the wrong word, but they seek it nonetheless. Every little piece of previously unknown information is cause to change something.

New and different is exciting.

It could be as simple as, “We don’t go to that restaurant any more. It’s good, but we are trying others.” or as complex as, “I think I will become a Buddhist”

With these folks, nothing is ever good enough and able to be ignored. They are driven by events not by process. “Processes are so boring!”

Processes are boring, but at the same time they destroy the need to solve the same problem over and over. If you attach a process to a problem or opportunity, both become invisible. It is like a master clock-maker in 1890. They did not build one clock and then watch it run for a month and take it apart and rebuild it. They build it and go away. They create instructions to keep it running. They might occasionally reappear to lubricate it, or replace a worn part, but then they close up the case and go away again.

It is like that with investing.

You must create a process that works. Saving money is one. Investing for a time target far in the future is another. That long target makes short term volatility an unimportant thing. The key is behave like an investor. Create a purpose, allocate the capital and use a process that will mature to your satisfaction.

Sadly, that is incredibly boring, even though it works.  People like to see cause and effect closer together. Then there is the social part.

Have you ever tried to impress your friends at the club by announcing you have invested $50,000 in an index fund? Never happens. Limited partnership units in a movie, now that is fun. Maybe a private equity deal in pharmaceuticals. Maybe a portfolio of lottery tickets.

We all have a trader who lives inside us.  The difference being investors gain wealth by process and traders gain wealth by events.  The buy and sell part. The outwit the others in the market part. The good timing part. Over a long time that is a hard set of balls to keep in the air.

Maybe there is a middle ground.

The University of Rochester manages their endowment in two parts.  90%+ conventionally and about 10% to be invested in local businesses that have promise. Their hopes are to keep their managers eager and interested, to benefit the local community, and ideally, to earn a good return.

They have done well. Kodak was an early winner and in the ’50s a large investment in Haloid Corp paid off.  You may know Haloid Corp better by its eventual name, Xerox. Very exciting.

They might have done better with all their money in Kodak and Xerox, but they might have lost it all too.  It is easy to see the right way looking back in time. Thus the 90-10 split. Never risk what you have and need for something that would be nice, but you can get along without.

Investment manager Ken Fisher identifies the busyness problem inherent in long term investing.

“There is a time to buy, a time to sell and a long time to do nothing”

If the long time to do nothing part troubles you, allocate a little of your capital to trading. A tiny part. It will teach you things that are valuable and might make a little extra money. They will make you a better investor with the big part.

You will learn:

  • You never have enough information to make a perfect decision.
  • Even when you are right you can lose money
  • The market can stay crazy for a long time.
  • Other people know more or know it sooner
  • You spouse might not like the idea of you having options on 40 tons of sugar. Cocoa might be okay
  • Commodity and currency traders never sleep
  • Leverage works both ways

Sometimes life can be too exciting. Each of us has a balance between boring and exciting where things work out. Try to find it.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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