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Business / Finance

Investment Principle #4-Investing in asset classes instead of point selection

Club traders sMart-Lab. We make money on the exchange. 27.03.2021 at 20:24

Club traders sMart-Lab. We make money on the exchange. / RSS channel

The truth of life: a lot of research confirms that 90% of professional stock managers cannot show returns above the market.

In other words:

if you buy a stock on the US S&P500; stock market (or an ETF on the Moscow Exchange index, if you are a believer in the ruble), then you will be cooler than 90% of managers on the long run.

But these managers - with huge knowledge, training in the best universities in the world, vast experience and the best technologies. And even this does not help them to beat the market. (Google "Monkey Lukerya" and " Buffett and Protege Dispute”)

And we, sitting down to analyze stocks (to select the “best”) in our apartment on the outskirts of Moscow, enter into an unequal battle with these professionals (who, in turn, lose to the market in 90% of cases.)

⁃ So, is it really that simple? I buy an ETF on a stock index, and I kill all these professionals and traders?

⁃ Yes, it is. One “but” is if you are satisfied with a drawdown of -50%, when there will be a crisis.

Bli Damn, -50% hard, what to do?

The way out of this situation is to distribute investments between asset classes, so as not to put all the eggs in one basket.

Usually, the portfolio is divided between stocks, bonds, gold, real estate and commodity funds, and so on.

And rebalancing such a portfolio (usually once a year) helps to sell some assets at their peak, and buy others at the very bottom, thereby providing good returns with less risk.

This approach is called Asset Allocation. (google the topic: passive portfolio investments, asset allocation)

The disadvantage of this approach is:

it's boring, there's no excitement from the ups and downs like in stocks.

It is important to me that it is not boring, so I have allocated 10% of the investment to stocks, even though it hurts my portfolio in the long term.

We only live once!


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