Psychological challenge of sticking with a volatile portfolio

[Lucky C]

Any recommended books, or your own tips, for sticking with a portfolio that has a lot of volatility? By "a lot" I mean about the same volatility as investing 100% in a single country's stock market, more volatility than the classic 60/40 portfolio, for example.

I also have to deal with the psychology of sticking with an atypical portfolio - easy to do when it's beating the S&P500 but very difficult when everyone else seems to be making easy money except you! This is particularly difficult for me since my portfolio will be increasing in volatility while we are in our first year of not having any wage income - all while there are a lot of unprecedented things going on in the economy. Since the start of the last bull market I believe my net worth has never gone down by more than 5%, so at some point I am bound to be feeling more pain than I have in the past.

Any finance writers that focus more on maximizing expected returns instead of the more popular highly diversified portfolio / high Sharpe Ratio strategy of most retirement-oriented advisors? More of a "no pain, no gain" motivation. For example, Way of the Turtle touched on this, though I am not going to be doing commodity futures trading.

Besides seeking out new authors I should also change a few habits. Most importantly not checking my account balance so often. Also taking a break from Twitter / finance news or at least only looking at highlights weekly. Maybe trying meditation as well. In general though I need to become better at sticking to my own rules and routines.

[Stahlmann]

hmm.
gain some experience with your problems.
write book, lie a little about your "success".
acquire some fanatic followers.
???
you have additional income source and relying on the market is not the last option.

it seems it was popular in 2005-2010 on the wave of "intetnet marketing".

[7Wannabe5]

You might try “The Hour Between Dog and Wolf: Risk-taking, Gut Feelings, and the Biology of Boom and Bust” by John Coates.

[Jason]

If you wait a few months, I suspect this guy will have a book out on the topic.

https://www.marketwatch.com/story/warre ... 2020-06-09

[Lucky C]

@7W5 sounds like a good one, thanks!

[IlliniDave]

For me the best thing to do is to just not check the balance, albeit that is not easy to do either. I remember one day quite a number of years back when I sat down with a stack of several years worth of unopened quarterly statements that I filed away still in the envelope. I opened them to file them more space-efficiently. I didn't even care about the balances then. I'd just check the balance once a year by phone at first, then later online.

Filing the that way wasn't something I did deliberately/strategically. Retirement was so far off that I didn't care enough at the time to read them when they came.

Now that retirement is close I check online more frequently when we have strong market movement up over a few days or a week. Never look after big negative stretches. I also get a month-end balance for my tracking spreadsheet.

No suggestions on high risk/high reward strategy information. Being 100% stocks for a couple decades was the apex of my bravery.

[7Wannabe5]

@IlliniDave:

According to the authors of “Nudge”, just not looking is a good psychological strategy to overcome risk aversion. Since the market is likely to be down as many days as it is up, checking your metrics every day will tend towards making you feel more unhappiness than simply going to sleep like Rip Van Winkle.

I am not terribly risk-averse but I am quite inattentive, so my not-necessarily-recommended strategy is to hand-pick a handful of very small caps for the medium/long run. Probably the stock market equivalent of investing in a variety of young racehorses

[jacob]

The key is to focus on the process, which you directly control, rather than results, which you control only indirectly via the process. Note the similarities between good value investors and good index investors to see why they're both focused on the process. The value investor believes he has a correct opinion on the value. To back this up he has a theory of value like fundamental analysis. Volatile price movements determine is whether he's buying or selling. The index investor believes that nobody can have a correct opinion on the value. To back this up he has a "Nobel Prize winners" and a bunch of slogans and graphs showing that "the market goes up and down" and "the market goes up in the long run". Volatile price movements either makes him feel richer or that he's getting "stocks on sale".

Investors who get in trouble are those who have no process and just look at the account value. Having no process or rudder also makes a person prone to jumping strategy---typically in the company of other rudderless investors who thus make good contrarian indicators.

[Jason]

I like the anthropomorphic "Mr. Market" to distinguish those variables that impact stock pricing outside of business performance. So along with a cadre of other "Mr.'s" i.e. Peanut, T, Ed, Magoo, Spock, Clean, Potato Head, Money Mustache, it reminds me not to pay attention to what it is saying. Obviously, I am excluding Rogers. He means business.

[Tyler9000]

With my obsession with portfolio theory I admit I may not be the best person to answer this question. It strikes me too much like the classic "Doctor, it hurts when I move my arm like this." "Then stop."

But to the spirit of your question, I think the most impactful thing you can do is to identify the reason that the day-to-day account values matter so much and the losses (or relative underperformance to other options) bother you. For example, it's really common in the FIRE community for people to watch their account balances like a hawk multiple times a day. But if they're really honest, the root cause is that many hate their jobs and the number represents progress towards a way out. In that case, "not looking so much" is really just a way of punting on a meaningful fix. Find a job you actually like and you may simply stop caring about your net worth.

Obviously your motivation may be different. But my best advice is to find the root cause of your fear or dissatisfaction and fix what you can control.

[nomadscientist]

This is probably the toughest problem of all because you don't know how you will react until you try it. Here is a professor of economics who believed in the Boglehead thesis but still swapped 100% equities for 90% bonds at the corona trough (point 12). You just do not know what you will do.

What is more, several people have now convinced themselves that they can stand short, sharp shocks. Of course many people can't even do that. But how would you deal with the market flatlining for 10 or 20 years? It has happened before.

Like the hypothesis that you can beat the market, the hypothesis that you are psychologically suited to invest at all can be tested only on the timescale of your lifespan.

[Mister Imperceptible]

I look at it like a poker game. When I feel like I have read the cards but more importantly I have read the players, and I know I have a winning hand, I don’t fold.

If I own a call or put option that drops 50% in value but my underlying thesis has not changed, it means the other player is trying to bluff me. In which case I call (hold my position) or raise (add to my position).

Of course position sizing is important to allow for the possibility of being wrong. And having your hands (bets) anti-correlated helps because you are able to rotate out of a winning bet into another bet that is down in current market value for which your thesis has not changed.

So along with a cadre of other "Mr.'s" i.e. Peanut, T, Ed, Magoo, Spock, Clean, Potato Head, Money Mustache, it reminds me not to pay attention to what it is saying. Obviously, I am excluding Rogers. He means business.

Nor Mr. I!

Not chess, Mr. Spock. Poker.

[Mister Imperceptible]

If you wait a few months, I suspect this guy will have a book out on the topic.

https://www.marketwatch.com/story/warre ... 2020-06-09

This was truly hysterical. He should be up a billion percent. Hope you learned from Mr. Pawnboy.

[Mister Imperceptible]

Christopher Cole: Volatility is an Instrument of Truth

viewtopic.php?f=3&t=10423

[Jason]

Nor Mr. I!

You fall somewhere between Messrs. Big Stuff and Roboto.

[Lucky C]

I also need to write out my strategy/process rather than just keep looking at and updating a big Excel sheet. Maybe post a summary / rules up on the wall.

Previously I had gone through many iterations tweaking it (lots of experimentation with historical data in Excel), but now I feel like I will be comfortable locking it down and not trying to change it, especially after seeing how it would have done during these recent Covid-induced stress tests. It's still scary though, going all in on a more volatile strategy in the midst of this crisis.

I need to keep reminding myself that there's nothing to worry about. We are at about a 3% withdrawal rate and could get by on a single minimum wage income, with at least one of us probably going back to work at some point in the next few years. We could really start working again immediately in the unlikely event of an unprecedented drawdown. I should be embracing more volatility (of course with the goal of higher upside volatility more often than downside).

[Nomad]

These days, I do not stick with a volatile portfolio.

What I do now is go here and look at the CAPE/Shiller index: https://www.multpl.com/shiller-pe
Currently it is 28.15, therefore I have about 28.15% of my stash in non-equities.

If the market gets overvalued, say it goes up to 35, then I sell some equities and buy cash/gold/bonds until I have 35% in those.

As the market is now dropping, next week I will probably be selling bonds and buying equities.

[Mister Imperceptible]

If you wait a few months, I suspect this guy will have a book out on the topic.

https://www.marketwatch.com/story/warre ... 2020-06-09

Stocks Crash, Hit By Biggest Sell Program On Record; Retail Favorites Implode

Looks like “Retail” now has a face. This is going to give me so much joy.

https://mobile.twitter.com/stoolpresidente

[plantingtheseed]

Risk only what you can afford to lose. Also, don't lose money - i.e. think in terms of the drawdown more than return to risk.

[Lucky C]

That's the idea. Backtesting my strategy shows very low drawdown. Volatility isn't crazy high but in the past I've been very diversified and conservative so it will take some getting used to. The psychological challenges will be:
- Feeling like I'm too concentrated in a few assets even though that's what should help it to work better than a more diversified portfolio.
- If I'm losing money early on, it will feel like I may have gotten something wrong with the strategy (data mining or just too optimistic about backtest results translating to future performance)
- If I'm making more money than I have in the past, I may feel tempted to take winnings and go back to a more conservative portfolio rather than continue what's working to maximize return.