The “fear curve” is an emotional roller coaster ride that shakes many investors out of the market. It’s the reason they buy at tops and sell at bottoms…
As you can see – and have probably experienced – the greatest opportunities often come from ideas that are new or hated, and when market panic and despair are high. That’s when people are most uncomfortable…
But it’s also the best time to buy.
Today, we’ll show you how to conquer the market fear curve by protecting yourself from the greatest risk of loss… and positioning yourself for the greatest opportunity for gain.
Five Rules to Protect Yourself From the Greatest Risk of Loss
Now, the best way to do this is to avoid following the trajectory of the emotional roller coaster. And these five rules will help you make more rational investing decisions…
- Diversify your assets.
The secret to building wealth – and keeping it – is diversification. We recommend a mix of stocks, bonds, cash, real estate, collectibles, crypto, and other alternatives.
Not only does diversification lead to better returns, it also lowers risk. Numerous studies show that asset allocation accounts for 90%-plus of your investment returns.
- Tune out short-term forecasts.
The market’s short-term direction is unknowable. No one has a crystal ball. Even experts get it wrong more often than right.
Whether it’s stocks or crypto, unless you’re a day trader, daily volatility shouldn’t bother you. So don’t get sidetracked by the noise. Just focus on the big picture.
- Have a risk-management plan.
Before you can grow wealth, you need to protect what you have first. The best way to do that is with position-sizing.
Position-sizing refers to the size of a position within your portfolio (or the dollar amount you’re going to trade). Our simple rule of thumb is: If an investment gets stopped out of your portfolio, your maximum loss should be no more than 2.5–5% of your portfolio’s value.
If you know your downside is capped, then you can sleep easily at night. This way, you won’t panic-sell at the worst time.
- Use systematic investing.
Systematic investing simply means investing money regularly.
This can mean signing up for a direct deposit in a taxable brokerage account…
Taking advantage of a retirement plan where you can allocate part of your paycheck to investments (maybe even get an employer match)…
And switching your mutual funds, ETFs, and dividend-paying stocks to “dividend reinvestment” if you don’t need the income.
- Create a plan and stick to it.
Other than annual adjustments and periodic rebalancing, you shouldn’t deviate much from your investing plan.
If you have a life-changing event, revaluate your plan at that time. But sticking to a plan will help keep you from making emotional investment decisions.
Palm Beach Research Group