How To Avoid Having Your Strategy Blow Up


Zerohedge posted a very brief article about how eventually all investment strategies blow up and the ensuing come to Jesus moment that triggers. It asks, existentially, will you fold or double down when this happens? Having to face this dilemma doesn't seem like a good situation to be in. Fortunately, the context was for hedge funds and certain other pools of capital like complex funds available to retail sized accounts at brokerage firms.

I would argue that with the right asset allocation in terms of being in the accumulation phase, the withdrawal phase or in the face on any other type of life event, a strategic blow up is totally unnecessary and preventable. One key is having a simple portfolio. A mix of individual stocks and long only funds (meaning they don't sell short or use very complex strategies) is a good start on keeping it simple. I am not against using funds with complex strategies, they just take more time to understand and monitor and you need to get the sizing right in case that complex fund blows up.

Realistically, whether you do a ton of work on your portfolio or very little, the most realistic outcome to hope for is that you're kind of close to the market on a long term basis. That might not sound so exciting but kind of close, combined with an adequate savings rate and suitable asset allocation can absolutely get the job done.

That leaves one other input to the equation for getting the job done which is not succumbing to emotion caused by large declines (fear) or FOMO (greed). An example of succumbing to fear is selling out after a large decline in the market and your portfolio. An example of greed would be watching Bitcoin rocket higher and allocating a large portion of your portfolio to it after that lift.

I've said before that if you have to sell a tiny piece after a large decline to get that capitulatory feeling to prevent more panic selling then do it. It is far from optimal but the consequences of being wrong because you went from 60% equities to 55% are slight compared to going from 60% down to 20%, 10% or even zero. In terms of greed, someone who put 2% into Bitcoin at $19,000 a year and a half ago, might feel silly after the fact but any reasonably diversified portfolio can be resilient in the face of a 2% mistake.

On Saturday the Washington Nationals hosted the Kansas City Royals and wore powder blue, Montreal Expos throwback uniforms. This is the sort of thing I geek out over, it was a lot of fun to watch. I took several pictures of the game on my TV including the one in the header of this post.