Something I have been thinking a lot about recently is those hidden factors that decrease your return without you really realising. These factors - like taxes, transaction costs, etc. - are the reason that when you see a stock/index/other asset you hold went up by x%, your account doesn't quite mirror this return.
The most overlooked of these factors is unplanned withdrawal.
Investing is not a game. Investing is not a scientific experiment. Investing takes place in the real world, where stuff happens outside of your portfolio that you can't control.
Now, most people will say that this isn't an issue if you just have a bit of discipline and financial control, but that's not always possible. For example, let's say you plan to hold $AAPL for the next 5 years. However, 2 years from now your brother get's sick and asks for help paying hospital bills. Goodbye Apple stocks (you take a loss). Or let's say you decide to buy a house earlier than expected and want to put down as large of a deposit as possible. You're gunna liquidate your portfolio, regardless of how long you originally intended to hold assets within it for.
Even if nothing exogenous forces liquidation, you might change. Your strategy might change. This has happened to me multiple times - I've had to basically abandon what I was doing and start again because my attitude to investing changed. You might think this will never happen to you but ask yourself this - has your attitude to anything significant changed over the last 5-10 years. For most, the answer will be yes.
This, in my mind, is an argument for the following:
- Decomposition. You want to hold several small parts in order to sell some off when needed.
- Diversification. Have a broad variety of assets with different time horizons, payoff profiles, etc. because, again, you might need to sell some off.
- Shorter time-horizons. If your planned holding period is short, your strategy is less likely to be influenced by things that happen outside of your portfolio.
- Cash reserve. Having a substantial buffer of cash will help to prevent these unplanned withdrawals as you can simply dip into this emergency fund for most expense shocks.
What do you guys think? Is this irrelevant? Is it superfluous? Would love to know your thoughts!
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P.S. if you're intrigued by this idea and want to find out more I dive into more detail (including a personal example) here :)
Submitted June 25, 2021 at 03:53AM by _Haydn_Martin_ https://ift.tt/2UBioFw
