Parts of my body still hurt today…
You see, I had a nasty little surprise last week.
I was on the phone with a friend and decided to walk down the stairs to grab a drink.
Alas, I was wearing wool socks … and we’d just polished our wooden stairs.
You can imagine what happened next.
On the third step down, I slipped … and then proceeded to fall down the stairs until I crashed into the hallway wall at the bottom.
I avoided any serious injuries or broken bones.
My pride was the only thing wounded. Please, feel free to laugh at my expense.
Had anyone been watching, the entire incident would have resembled something out of a cartoon where the protagonist slips on a banana peel and goes flying.
There are lessons here, apart from the obvious one of not walking down slippery stairs in wool socks while distracted on the phone.
And they tie right in to managing your portfolio.
Investing Lessons From My Epic Fall
My fall reminded me of three important keys to investing:
- Hindsight bias.
- Survivorship bias.
- And insurance.
No. 1: Hindsight Bias
In retrospect, I was stupid to wear those socks on that stairway.
But it didn’t seem obvious at the time.
I had been wearing the socks all evening, and it never occurred to me to take them off to walk down the stairs. I also could have hung up the phone!
Likewise, almost every trade seems obvious in retrospect … but it’s never that obvious when you’re in the trenches.
As noise bombards you, such as when you read a headline or an earnings report, any trade you make becomes a game of assigning probabilities with patchy and imperfect information.
This is why you always need an exit strategy to your trade, such as a stop-loss.
You go into the trade expecting not to need it, of course. You expect to win.
But you have to have that risk management in place, too… just in case.
No. 2: Survivorship Bias
I got lucky.
Had things gone a bit different, I could be dead, paralyzed or nursing compound fractures.
It would be a mistake for me to assume that because I’m fine, falling down the stairs isn’t that risky.
Likewise, you should never assume a trade was “right” because it made money or “wrong” because it lost money.
Remember, there is a lot of short-term randomness in the market.
You can make a trade for all the right reasons and lose. You can also throw darts at a page of The Wall Street Journal for stock ideas and win.
It comes down to process and repeatability.
In Green Zone Fortunes, Adam O’Dell and I have our processes, and we stick to them.
Not every trade works out.
But over time, the process works.
Investing Lesson No. 3: Insurance Is Important
Last up, I have life insurance. A lot of it.
I’m worth more dead than alive.
I have three children who would need support if I made an untimely exit from this world, so I consider it necessary.
I pondered that as I grunted to get back on my feet at the bottom of the stairs. (If I’m being honest, my real thought was: Gee, this would have been an embarrassing way to die, but at least it beats dying like Elvis.)
There are different ways we can “insure” ourselves when trading. The best risk management starts with position sizing.
Sizing your trades so they don’t throw your portfolio out of balance eliminates the risk of unrecoverable losses.
Stop-losses can also help on that front, and we employ them on all our trades in Green Zone Fortunes.
Another tool that works wonders when done right is diversification.
The key here is “done right.”
Diversification works best when the investments in question have a minimal correlation to each other.
For example: We love battery stocks and write about them often in Green Zone Fortunes.
But we’re not going to recommend a portfolio of nothing but battery stocks.
That would be ridiculous.
We explore a variety of mega trends that are independent of one another and spread our bets across them.
Of course, our most recent high-conviction stock recommendation is a battery stock. (It’s up 13% since we added it to the portfolio on August 19, and we think that’s just the start.)
But renewable energy is just one mega trend we’re invested in. Click here to see why in Adam’s “Infinite Energy” presentation.
We’re also holding stocks within mega trends such as genomics (aka DNA science), artificial intelligence, infrastructure and more.
And we’ll diversify into more mega trends if and when they meet our strict criteria.
If you want to see how we use everything I talked about above to help you adapt and profit in ANY market, click here for details on how to join Green Zone Fortunes.
And if you have any questions about how we do things (or grippy sock recommendations), email us at Feedback@MoneyandMarkets.com.
Until next time…
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.