The second-best plan that you can execute is better than the best plan that you can’t execute.
Will you make more money if you allocate at least 80% of your assets to stocks and other risk assets? Yes. But how will you hold on during a gut-wrenching bear market that gives you the feeling you’re losing everything? You could just refuse to look at your statements, or listen to financial media. But most people will bump into that randomly during a bear market, because the level of chatter goes up so much. It may be better to take a second-best solution and reduce the portion of risky assets to 50-60%, and simply sleep better at night.
Do you have a nifty trading strategy that you are tempted to overrule because it generates trades that you think don’t make sense, or come at times that seem too painful? Perhaps you need to abandon the strategy, or lower the size of the trades done. Maybe do half of what the strategy tells you to do.
If you use the Kelly Criterion to size your trades, and the volatility drives you nuts, maybe size your trades to “half Kelly.”
Am I offering an opiate for underachievement? Well, no… maybe… yes… Look, personalities are not fixed. If you have sufficient motivation, you can come up with ways to change your personality to be able to deal with more risk, or, conclude that you will do better if you take less risk. But if you can’t change who you are, then you have to adapt your investment strategy to let you be happy while still achieving most of your goals.
So, know yourself, and know the markets well. Leave some slack in your strategy.
For most of us, that will pay off in a big way.
Adapt from an article by David Merkel at The Aleph Blog:
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