In my last post I wrote that drawdown reduction is a key element of a successful, long-term investing career. But why is that? For that, ask yourself what your long-term goal of investing is. Here some of my thoughts:
In my surroundings a lot of people tend to take risks in order to get wealthy fast. Some are aware of it, some not. Long term it might work, but the probability is quite low. Typically, they make some profits, get excited, take on more risk. And at some point, they lose most of their account.
Being young, this is might not be the end. The total value of the lost money usually is not too big, so that the losses can be compensated through savings. Once the account grows, this changes. And with it the possibility to recover from big drawdowns. Both from a financial and a mental point of view. Over the years new responsibilities come along. You might get married, get children who want to go to university, you need money for a house (is it a good idea for Switzerland?..), you need money for your pension, etc. So, investing more aggressive is simply not an option anymore.
As mentioned, investing aggressively with a lot of big ups and downs on the way might bring you to your goal fast, but the probability is quite low. Especially because you just might pull the plug once one of the big drawdowns comes along. Being defensive but consistent will bring you to your goal with a high probability. It will just take more time and a lot of dedication. Remember: Investing is a marathon! You have to be able to invest over 10, 20, 30+ years. And to be able to consistently make a good rate of return without losing a big chunk of your portfolio every couple of years, drawdown limitation is key. Only then I can be sure that I won’t stop investing at the worst possible moment.
If you are willing to take high risks (leverage, risky products, …) to get more return, ask yourself: Why do you need this excessive return? Usually, the reason is not because it makes (mathematically) sense. But rather that you aren’t happy with the current situation you live in. And you try to escape from it by taking more risk. If you need 20%, 50%, 100% yearly returns to reach your goal, most probably the returns aren’t your real issue. In my eyes, it’s key to set one’s expectation right and to fix the problem where at its roots. As an example, take the following consideration: If someone would offer you the choice of getting rich slowly (20-30 years) with a high probability of success or fast (1-3 years) with a low probability success, which one would you rather take? And why?
Have you ever asked yourself what’s your financial goal? And if so, once your reach your financial goal, what would you do then? As far as I’m concerned, once I reach my “financial finish line”, I would hope my life isn’t going to change hardly at all. I’d hope to continue doing what I’ve been doing for the last years knowing that, financially speaking, I don’t have to. And by reducing drawdowns, I know that I’ll reach that finish line with a very high without having nightmares in between.
And therefore, tactical investing is the right way to go for me. Is it for you?
Best, Alex