Rules to follow for investment

Navigating What Comes Next

As noted, investors' biggest problem is discerning between market action and the economic and fundamental dynamics.

Let me be very clear…I have no idea if the market bottomed in October or not.

However, there are some rules we can follow.

Rule #1: Cut Losers Short & Let Winners Run.

It takes tremendous humility to navigate markets successfully. There can be no such thing as hubris when investments do not go how you want them. Investors plagued with big egos cannot admit mistakes, or they believe they're the most significant stock pickers who ever lived. To survive in markets, one must avoid overconfidence.

Rule #2: Investing Without Specific End Goals Is A Big Mistake.

Before investing, you should already know the answer to the following two questions:

1. At what price will I sell or take profits, if I'm correct?
2. Where will I sell it if I am wrong?

Hope and greed are not investment processes.

Rule #3: Emotional & Cognitive Biases Are Not Part Of The Process.

If your investment  (and financial) decisions start with:

• I feel that
• My friend told me
• I heard
• I hope

You are setting yourself up for a bad experience.

Rule #4: Follow The Trend.

"80% of portfolio performance is determined by the underlying trend. "

Rule #5: Don't Turn A Profit Into A Loss.

Investing is about creating returns over time. If you don't harvest gains and allow them to turn into a loss, you have started a "financial rinse cycle."

Most importantly, "getting back to even" is not an investment strategy.

Rule #6: Odds Of Success Improve Greatly When Technical Analysis Supports Fundamental Analysis. 

The market, for a long-time, can ignore fundamentals. As John Maynard Keynes once said:

"The stock market can remain irrational longer than you can remain solvent. "

Applying a technical overly to determine the "when" to invest can significantly improve the return and control the capital risk of the "what" fundamental analysis uncovers.

Rule #7: In Bull Markets, You Should Be "Long." In Bear Markets – "Neutral" Or "Short."

Investing against the market's major "trend" is generally a fruitless and frustrating effort. During secular bull markets – remain invested in risk assets like stocks or initiate an ongoing process of trimming winners.

During bear markets, investors can reduce risk asset holdings to their target asset allocations and build cash. An attempt to buy dips believing you've discovered the bottom or "stocks can't go any lower" generally doesn't work out well.

Rule #8: Invest First With Risk In Mind, Not Returns.

Investors focusing on risk first are less likely to fall prey to greed. We tend to focus on the potential return on investment and treat the risk taken to achieve it as an afterthought.

Responsible portfolio management aims to grow money over the long term to reach specific financial milestones and consider the risk taken to achieve those goals. Managing to prevent significant drawdowns in portfolios means giving up SOME upside to prevent the capture of MOST of the downside. While portfolios may return to even after a catastrophic loss, the precious TIME lost while "getting back to even" can never be regained.

Rule #9: The Goal Of Portfolio Management Is A 70% Success Rate.

Think about it – Major League batters go to the "Hall Of Fame" with a 40% success rate at the plate.

Portfolio management is not about ALWAYS being right. It is about consistently getting "on base" that wins the long game. There isn't a strategy, discipline, or style that will work 100% of the time.

Once you understand that, the other 8-rules above become much simpler to incorporate,

As an investor, stepping away from your "emotions" momentarily is most important. Look objectively at the market around you. Is it currently dominated by "greed" or "fear?" Your long-term returns will depend much on how you answer that question and manage the inherent risk.

Roberts Lance