Good Investors Plan for the Worst

by: Roger Nusbaum

roger nusbaumRoger Nusbaum submits:

"You don't win bike races easy. If you don't have trouble along the way, well it simply isn't a great race, is it?"

-- Phil Liggett earlier this year covering the Tour of California.

I think this is a great quote, and I think it applies to investing. Over a normal investing lifetime you are going to have trouble along the way. This is guaranteed. We all had trouble at the beginning of this decade because of what the market was doing.

We can expect more of this, to some magnitude, in the future with corrections, bear markets and I would expect a genuine crash at some point too. 1929 was not the first crash, and I doubt 1987 will be the last crash. This is not an attempt to predict a crash; just noting that they happen every once in a great while.

It has been a while now since the last big market event but it is not the end of them. I would suggest anyone get a Stock Traders Almanac and look at the monthly and yearly data and really take it in.

The periods where the market did nothing (after the depression and the 1970s) were actually wildly volatile on a year-to-year basis. There have also been quite a few six week periods where the market got hit 15-20%.

What sort of panic would ensue if the S&P 500 declined to 1230 between now and Memorial Day? What would you do if that happened?

Another type of trouble along the way is making some sort of mistake within our own portfolios. There are white papers galore that expound on all of the emotional failings that get in the way of our stock market success. Ken Fisher believes that our brains are not wired for capital markets. I don't know if he is 100% right, but I doubt he is 100% wrong.

One the things that leads me to put only 2% or 3% into a position is an acute awareness of how dumb I am. We will all make dumb stock picks, this goes with the territory. But I am not going to let this type of dumbness damage a portfolio.