Finance 2. Diversify your information One of the key differences between today and, say, 10 years ago (or 20 or 30) is the amount of information which investors can access. With the advent of the internet, the proliferation of investment blogs and the success of all-day cable news, it’s never been easier to find background info, data and opinions about issues and crises − whether financial, economic or political. Most of the time in the financial world, knowledge is power: the more information that we can access when we consider an investment idea, the better-informed and more insightful our decision to buy or sell will be. During “interesting” times, however, this surplus of information can have a profoundly negative psychological effect which we call confirmation bias. The frequency with which we hear words such as “crisis,” “problem,” “emergency,” “mess” and their various synonyms can become self-reinforcing. We come to discount opposing viewpoints and believe that the only news which is authentic or “real” is bad news. So, when you read about a givencrise du jour, make sure to approach it with a critical mind. Diversify the sources of your information and actively seek out opinions and perspectives that differ from your own. Force yourself to consider other points of view. Interestingly, this is a core trait of many of history’s most successful investors: the ability to seek out (and respect) contrary opinions. Above all, remember this: unlike math (a subject in which the answer is either right or wrong) in both economics and politics, there are many questions in which there are multiple “right” answers − and multiple “wrong” answers too. Or, to put it more plainly: for every compelling reason why the world is going to you-know-where in a handbasket, there is likely to be several equally compelling reasons why it isn’t. 3. Understand how you sleep No, we’re not talking about what kind of pillow you happen to use. Rather, we’re talking about understanding how (and how much) the ups and downs of the market keep you up at night. As markets have trended ever higher, many investors have increased their exposure to stocks, real estate and other investments that are much more sensitive to volatility. But when a recession eventually hits − within six months, a year, perhaps a little longer − the bad times may well be exacerbated by the various political issues and other crises with which the world may be struggling at the time. So, as we move through these “interesting” times, it’s a good idea to re-evaluate the amount of risk you’re actually comfortable with. Ask yourself: how much would you worry if worse comes to worst in the trade wars?What would you do if you woke up one day to find out that one of the companies you invest in had been hit hard by some crisis or another − would you be able to stick it out or cash out? How would you feel if a recession hits and your portfolio drops by 10%, 20% or more? Howwell would you sleep at night? Wouldn’t worry you all that much? Great − keep calm and carry on. But if you’d see yourself lying awake staring at the ceiling as you worry about how the state of the world will affect your portfolio, now might be a good time to trim back your more volatile “risk-on” holdings (see below). 4. Insulate your portfolio from the trade wars Part of what makes the current times we live in so “interesting” is the complex intersection of politics, economics and world events. A crisis in any one of these areas would be difficult enough to understand. But these days, political events can have a profound impact on the economy, which can spark an event halfway around the world, which can start a new series of political events, which can start the whole cycle over again. Sure, you could spend your time trying to figure out what it all means for your portfolio, buying and selling according to whatever headlines you read in The Economist. But most of us have neither the time, nor the inclination, nor the skill to do that with 100% accuracy (does anybody?). So instead of trying to figure out what’s going to happen, it makes sense to diversify your portfolio as much as you can: among different markets, different sectors of the economy, different capitalization levels, and so on. You’ll want to pay particular attention to your geographic exposure here. If your portfolio is “all in” on a country that happens to get itself involved in a protracted trade war (the obvious examples right now: US and China), your portfolio will likely feel the pinch, regardless of whether that trade war actually happens or not. CSANews | WINTER 2019 | 33
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