With accumulated capital, how and when should you enter the market?
I usually write articles for those who accumulate capital through salary and/or business income. Such investors act gradually and the process of accumulation takes 10 or even more years.
But then there are those who don’t need to be taught the theory of how to earn and save. These are the people who have received their capital all at once:
- They got an inheritance.
- They sold a business for a profit.
- They sold an expensive liability (a country house, real estate by the sea, etc.).
- They got divorced and received a portion of their ex-spouse’s estate.
How should they proceed? There is very little information about such situations in the books.
I shall Immediately answer the main question — buy all at once or gradually? Figures show that it is better to do it all at once.
So that’s a quick math lesson for you. But in real life it’s not like that. I regularly encounter rookies with money and fear in their eyes at the same time.
Usually we look at the index charts. But a rookie’s portfolio value chart will be different. That’s because a rookie is acting spontaneously and often makes silly decisions.
Rookies need to think about the psychology in addition to thinking about the numbers. This is what I propose we should talk about.
The psychological side of the question
Imagine a rookie investor who has had a fortune of $500,000 dropped on his head out of the blue. He seeks the advice of his senior fellows. They say unanimously that it is possible and necessary to enter the market at once. A rookie then hires a consultant who draws up a balanced portfolio for him.
And then comes the collapse and/or correction phases. A rookie sees a loss of several dozen thousands of dollars in his mobile trading application. Or even experiencing halving of the starting portfolio size. He then blames the consultant, of course. What will happen to him without third-party assistance? A rookie will sell away everything at the market bottom and thus leave the market forever.
Here’s another example, this time from real life. A buddy of mine, far from the world of investing, was asking for advice in late 2019. His savings at that time were already under $125,000. I tell him about the dividend and passive strategies, about the ratio of asset classes and volatility. It has no effect on him whatsoever.
He divides the portfolio into two parts — the right one (as taught) and the risky one (as portrayed in trendy YouTube shows and Telegram channels). At the peak of the 2020 crisis, he owned cruise companies, airlines, Boeing, and other “interesting” securities in his trading app. 🤦♂️🤦♂️🤦♂️
Instead of feeling confident and sleeping like a child, he was nervous all the time. The temporary drawdowns of the risk portfolio were quite tangible. He messaged me once a week with the question “Well? Will the price return to the previous heights, do you think?”
Knowledge
I strongly recommend that rookies with a pot of money at their disposal put all the money on deposit first and learn the basics for at least six months.
You need to build an educational system. Buy and read the right books. Listen to seminars and podcasts. I talked about all of this recently on my Youtube channel.
Then it comes down to the following:
•Set your goals. What exactly it is that you want from your accumulated capital
•Choose the strategy that makes the most sense and is the most comfortable for you, such as dividend, income, passive index, value.
•Decide on the proportion between asset classes. How many stocks, how many bonds and how much real estate you will own.
Feedback
You need some feedback, so that you can get punched in the face at least once. That’s why when my friends say something like “I’ll wait for a correction”, “I’ll buy some American Airline shares at the market bottom”, I don’t discourage them too much.
The pain of volatility
Let’s say you encounter your first losses and realize that you are having a very hard time dealing with them. Divide your cash into 6 to 12 stacks and enter the market in equal installments over the course of the next year.
By the way, that’s how most people enter cold water. Although everyone understands mentally that it’s better to dive in.
I also advise the fearful investors to have a lot of assets in their portfolio besides stocks that don’t have appreciable volatility — short bonds, commercial real estate, etc. Such an approach provides a healthy sleep. And healthy sleep is the most important factor in an investor’s survival in the long run.
Psychological help
Although I don’t like financial consultants, I understand their role very well. They are psychologists from the world of finance. In a difficult moment you need someone to stop you from doing something stupid. Someone to tell you that everything is going to be okay.
There must be such a person in your contact list. It is better if he is a small private investor himself. If he makes his money primarily from consulting, that’s a little worse, but it’ll work, too.
