The Investment Scientist

The Secret To Better Investing Is In Your Wardrobe

Posted on: December 17, 2018

wardrobe-interior-500x500.jpgInvestors are extraordinarily good at hurting themselves. They all plan to buy low and sell high, and yet what they all end up doing is buying high and selling low.

They do that by 1) piling onto the market when it is riding high and bailing when it is dropping low; 2) chasing the immediate past “winner” whether that is gold, emerging market stocks or the S&P 500 only to see the winning streak fizzle. Basically, they are systematically overpaying for assets.

If that sounds like you, well you are not alone. But here is the good news. I am going to give you a simple trick that can help correct your destructive tendency and thereby make you a much better investor.

So are you ready? Drum Roll, please …..

Treat your investment portfolio the same way you would treat your wardrobe.

What are you talking about? Are these two even comparable?

For simplicity’s sake, let say you acquire your entire wardrobe from Neiman Marcus. If Neiman Marcus has an across-the-board 50%-off sale, would you throw up your hands in despair and say,“Darn it, my entire wardrobe just lost half of its value. I better sell it all at the flea market or I will lose everything?”

I am gonna bet you won’t. In fact, you will probably race back to the store and pick up a few more pieces at half price. And this is exactly the same attitude you should have with stock market corrections (or bear markets). They are a temporary discount that you should take advantage of to acquire more assets at discount.

Now let say that winter is coming, and Neiman Marcus marks up their wool coats by 30%. Would you exclaim: “Hurray!!!!” and run to the store and buy ten more coats that you don’t need? It sounds so dumb, right? But when it comes to investing, people do that all the time.

The bottom line is, to achieve lifetime investment success, you must have a systematic way to buy assets at discount. This can be achieved by having a target asset allocation. If a certain asset class drops in value and thus falls below the target allocation, go buy some more. If you do this systematically over your lifetime, you will own more assets (acquired at lower prices) than all the other folks who like to acquire assets at higher prices.

That’s why I want you to treat your portfolio the same way you would treat your wardrobe.

(Feel free to share if you find it insightful.)

Schedule a Discovery review with me, or get my white paper for free: The Informed Investor: 5 Key Concepts for Financial Success.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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