Stock Market

Question 1

Don’t Panic

Answer 1

Don’t lock in your financial losses when the world experiences a market crash, instead, it makes more sense to simply ride the crash out and wait for your stocks to rebound. One of Ray Dalio’s mantras is:” Markets always return to the mean”. Everything that goes up must come down and vice versa. The biggest mistake investors make is moving money in and out of the market at the wrong times. They get excited or panic and take losses and miss out on wins, even though it’s the exact thing they try not to do. This is where the All-Weather portfolio is good since it gives you a lot of downside protection and market crashes won’t be as scary, causing you to panic. The only problem is the upside potential has proven to be greater in stocks, so if you can stomach it, stick with stocks and ETFs for now and consider switching later.

A summary of the principles taught in MONEY, Master the Game is:

1. Asset location is everything. Diversify, diversify, diversify.
2. Don’t hesitate to get into the market or have perfect timing; it simply isn’t possible. Use dollar-cost averaging instead and diversify over time.
3. Have a dream bucket that gives emotional juice and excitement for you to not feel everything is about investing.
4. Use tax harvesting to minimise your losses. 5
5. Your house is not an asset. People think a house is a safe investment, but every financial crisis reveals the stupidity in this and house value often plummets. It’s also a harder investment to sell.
6. Average investors should never attempt to pick stocks or time the market. This is Warren Buffett’s standpoint and he encourages us to buy an index or ETF instead to minimise cost and maximise the upside. Ray Dalio also says you won’t beat the market, no one does, except a few gold medalists.

Question 2

Don’t Lose Money

Answer 2

Warren Buffet’s number one rule in investing is not to lose money, and his number two rule is to follow rule number one. The key is to invest while protecting yourself with downside protection while having the potential for a big upside. Richard Branson, who started Virgin Airways, launched the company because he had negotiated an extraordinary plane deal. The deal was he would buy five aeroplanes and if his airline company didn’t work out he could return the planes with a money-back guarantee. These no downside risk deals are rare, but the point is to minimise the chance of money while optimising for you to gain money.

A lot of different market investments give you downside protection, and once you have more time and money, it might be worth it for you to take a look at it or get a fiduciary to do it for you. See page 134 in MONEY Master the Game for a rundown on how to find a good fiduciary. A fiduciary is entitled to always do what’s in your best interest, which brokers in mutual fund companies don’t have to. A comparison can be made between a butcher and a dietitian, the fiduciary is the dietitian and the butcher is the broker. The butcher will always recommend eating meat, while the dietitian will advise what’s best for you. They also protect you from marketing noise, which can be a typical danger from a broker, who will lead you down a bad financial idea for which he has no stake in himself.