4 Most Common Investment Problems
I’ve never heard of anyone who is completely satisfied with their investment portfolios. Here are the 4 most common investment problems that the general population as well as professional investors face:
Investment Problem #1: Losing Money
Nobody starts investing with the plan that they will lose money. Yet if you ask virtually every investor (including me), they’ll tell you they’ve lost money at some point before, if they’re being honest. Losses, at a nominal level, happen every single day as stocks rise and fall throughout the trading day. There’s no practical way to trade in and out of your investments to completely avoid the plight of hitting the refresh button while looking at your portfolio and seeing a lower balance once it updates.
Now the solution is easy, right? Just don’t invest and park all of your liquid assets into cash? Well, that may work for the short run but over many decades, your money will lose much of its purchasing power due to inflation. Your money stuffed under the mattress or even in a bank account will be incapable of buying as many goods 20 years from now compared to today, so it’s effectively a loss. In order to protect the real purchasing power of your net worth, you’ll want to invest a portion into the Permanent Portfolio.
Although there are no guarantees in the future, overinvesting in the Permanent Portfolio isn’t likely to lead to a net loss (after inflation) after many decades nor will it drastically increase the volatility of your portfolio (unless your portfolio was previously sitting on a lot of cash.) However, your performance will likely lag the market and your friends’ portfolios especially if you’re younger.
Investment Problem #2: Too Volatile
A portfolio that’s always gaining or losing a large percentage of its value is likely going to be very stressful for you to bear with in the long run even if its overall trajectory is up. You will always be second guessing it and wondering if a big crash is imminent. It’s likely this persistent stress will take a toll on your sleep, career, leisure, family life, etc.
If you hate volatility, then there is only one fool-proof solution but it’s probably not what you want to hear: allocate more of your portfolio to cash, the only asset that does not fluctuate in price every single trading day.
As I’ve probably mentioned a dozen times, cash does not keep up with inflation. Allocate too much to cash and your returns will suffer in the long run.
Investment Problem #3: Not Making Enough Money
Everyone wants to make more money, right? With higher returns comes greater risks, aka the probability of losing money.
If you want to make more, then you’ll need to invest more in these 2 categories of higher risk index funds:
- small caps
- emerging markets
But make sure that the funds you choose are properly diversified! Avoid industry or country specific funds; make sure the small cap fund invests in a wide range of industries and isn’t particularly concentrated in 1 or 2. Likewise, make sure the emerging market funds are also diversified geographically among several countries in different parts of the world.
Allocating too much to these high risk investments will also increase the probability that you could lose a ton of money in the next downturn. But if your portfolio is already fairly stable and low returns are your biggest concern, feel free to gradually increase your allocation to these higher risk index funds. Avoid the temptation to buy individual stocks or funds that are concentrated in one or a few industries or countries (other than your own) unless you know those entities very intimately (chances are, if you’re reading this, you don’t fit in that latter group.) And it goes without saying but don’t even think about the many other dubious or complex investment schemes out there including forex, binary options, junk bonds, penny stocks, etc. because the vast majority of them will likely leave you broke and you’d need professional expertise in finance and investing to even stand a chance.
Investment Problem #4: Not Performing In-Par with the Market
You make 3% while the market returns 10%. The next year, the market returns 30% yet you only return 10%. While it’s not as nerve-wrecking (for most people) compared to losing money, it can be frustrating to underperform the market year after year.
If you’d like your portfolio’s performance to better resemble your benchmark, then the most direct solution is to allocate more of it to an index fund that tracks the benchmark. For most US-based investors, the S&P500 is their market benchmark.
Keep in mind that many market indices fell by over 50% in 2008 and devastated countless investors. If you want the returns associated with your benchmark, you must also assume its risks as well. If this isn’t a tradeoff that you’re willing to make, then you may want to change the index you’re benchmarking your performance against. It’s a bit of a psychological exercise as well: if you pick a new index (say the Russell 1000) but continue checking the S&P500 daily, your “change” of benchmarks is effectively meaningless.
Bad news first then some good news:
It’s impossible to eliminate all 4 of these drawbacks from your investing so you’re gonna have to make some tradeoffs. Reality check: if many people are capable to consistently removing all 4, then it’ll be relatively easy to succeed at investing and make a filthy sum of money without doing much work or adding value to society.
You don’t need to eliminate all of these drawbacks to be successful at investing. Prioritize them and create a portfolio that eliminates the drawbacks you find least desirable. If you subscribe to my newsletter, I’ll be sending out a Excel spreadsheet some time in the future with a questionnaire that’ll assess how you prioritize these drawbacks and suggest an asset allocation to you based on your results.