Financial markets, Aduc Tutela del Risparmio: how to “prepare for the worst”?

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Financial markets, Aduc Tutela del Risparmio: how to “prepare for the worst”?


Financial markets for the worst
Financial markets for the worst

If I had to indicate the most solid and significant concept that more than twenty years of daily experience in contact with the financial markets (and especially with non-professional investors) have engraved in my mind, I would indicate the one expressed in the following sentence – reads the note signed by Alessandro Pedone, responsible for the Protection of Aduc Savings (here other notes from the Association for the Rights of Users and Consumers on ViPiu.iteditor’s note) –.

Success in financial investments is due at least 80% to the psychological aspects and only the remaining part is about knowledge, techniques, tools and whatever else you want to put into it.

The importance of so-called “behavioral finance” is a consolidated fact also from an academic point of view, but my experience in the field has taught me that there is something much, much deeper in the financial markets. .

The first fundamental step to investing satisfactorily, as with anything really important in life, is acceptance (1) of existing reality.

In practically all aspects of life (affections, human relations of all kinds, work, health), we constantly create unnecessary suffering because, deep down, on a psychological level, we do not accept reality as it is. is and we wish to change what it is not in our power to change.

In finance, what investors do not want to accept is the fact that uncertainty is an inescapable aspect of the investment process. Almost everyone admits that in the financial markets it is impossible to predict what will happen in the short term, but then practically everyone tries to do it one way or another and wastes a huge amount of resources (of all kinds, starting with the mental and emotional ones) trying to seize the “best” moment to enter or exit the markets according to the various news items that at a certain moment capture the attention of financial operators (at the moment where I write, all the attention is on how the war in Ukraine will evolve).

Different people apply different ways of trying to “fight” uncertainty, but they all have the aspect of “struggle” in common.

They don’t accept the simple truth: investing in the financial markets inevitably exposes you to uncertainty.

I can’t grab one side of a stick without the other side in my hand as well; therefore I cannot invest without having some degree of uncertainty as to the outcome of the investment.

This is not a problem that only concerns non-professional investors. Professionals experience this lack of acceptance in an even more drastic way. They have developed a whole series of absurd techniques to try to transform uncertainty (which in essence is not quantifiable) into risk (that is to say statistically quantifiable).

Every time we try to do something impossible, we are basically wasting resources. Unfortunately, “resource waste” is the simplest and most accurate definition of current finance I can think of. It is not so much due to finance itself, understood as a set of tools. Conceptually, finance could be a tremendously powerful tool to optimize the economic resources of a company, and it is also that in part. As Bertrand Badré, former managing director of the World Bank, pointed out in his book “And if finance saved the world? Finance is a tool that can be incredibly misused, as almost always happens, but we can also decide to use it to our advantage. Everything depends on us.

As the old saying goes, money is a bad master but an excellent servant. It is we – and we alone – who give it control over our personal and collective lives, instead of using it as a powerful tool at our service.

What prevents us from welcoming uncertainty?

A participant in the Adult Investors Club (3) wrote to me a few minutes ago: “Although I try to think like an adult investor, I still feel like I have childish attitudes and that, like I told you in the presentation, is holding me back. I refer in particular to the uncertainty of the markets experienced as a danger and not accepted calmly and on the run”.

It is certainly a phrase from an investor that I define as an “adult”, because having this awareness is already something that 99% of investors do not have. Certainly we all have aspects of a child investor and a young investor, but very few have this awareness which could lead him in the future to become what I call a conscious investor (on this subject you can learn more about it with this article: “”.

The sentence of this friend of the Club, however, makes us reflect on what actually prevents us from experiencing uncertainty serenely, as an opportunity. Of course, each case is different and must be analyzed specifically, but in general we can say – as I have written on other occasions – that fear and greed play a key role.

Transforming fear and greed is the key to welcoming uncertainty.

Hope for the best, but prepare for the worst

Once we have made the passage described above, that is to say we have accepted (1) the uncertainty, it is possible to live with serenity even the most turbulent phases of the financial markets, such as those that we are experiencing due to the tragic situation in Ukraine (of course, with the term “serenity” I am only talking about the financial aspects, on the side of human tragedy, we should address issues very far from those we are dealing with here ).

There is a very simple rule that allows you to calmly follow the descents of the markets and it is the one described by an English proverb (“Always hope for the best, but prepare for the worst”) which can be translated more or less like this: always hope for the best, but prepare for the worst.

Applied to finance, this concept means that one must plan one’s investments by devoting as much as possible (in a manner compatible with one’s own characteristics in terms of concrete capacity and psychological tolerance to withstand market fluctuations), in instruments aimed at growth, because it is well known that on the whole it is much more advantageous to invest in uncertain and highly fluctuating instruments, but – at the same time – it is essential to always have part of our portfolio in cash (or similar ) specifically reserved for buying during downturns (on this invitation to read the article: “Do you have too much uninvested cash?” (4) which I wrote towards the end of last year). It is essential not only to have a share of liquidity intended to invest in the descents, but it is also necessary to have a precise plan which indicates how and when to buy. This project must be defined before the markets start to fall.

Of course, this project can be slightly refined on the spot depending on the circumstances, but the basic rules should remain the same.

The project rests precisely on the acceptance of uncertainty. We know very well that it will never be possible to buy on the minimums. Precisely because we know – and we accept – that part of these purchases will be during the descent, we will continue to keep some of this liquidity to invest in the event of further descents. We also know that one of the last parts of this liquidity will also be invested in the first part of the rises.

It is clear that this will never capture 100% of the hypothetical return of those who bought on the lows and sold on the highs, but an adult investor has long understood that this is simply impossible. There are only two categories of people who continually manage to buy on the lows and sell on the highs: liars and really big liars.

The purpose of “preparing for the worst” in this way is not to capture most of the market movement at that time, but to allow us to confidently hold the largest share of uncertain investments. in our portfolio.

There is no need to stress and sleep in a vain attempt to predict how long the descent will take and how deep it will be. We know very well that we can use it to our advantage in a simple way (2).

The absolutely wrong way to “prepare for the worst” is to be scared and sell the most fluctuating instruments lest they continue to crash. Or buy the instruments that are supposed to offer some protection in market panics (like gold, so-called “hard currencies”, etc.).

It may seem like a way to “prepare for the worst”, but in reality it is an attempt to “take shelter”. Rushing is the exact opposite of “preparing for the worst”, but that’s exactly what most investors spontaneously tend to do.

If you haven’t planned your investments the right way in time, the best thing you can do now is to do nothing but start learning from what you’re going through now and planning your portfolio for the future.

Remember: hope for the best, but prepare for the worst.

If you don’t have the opportunity to enjoy the descents today because you didn’t prepare in time, accept the fact that you have nothing to do at the moment, but start preparing so that you can do it. in the next descents.

To note

In most of the literature that deals with these topics, the term “acceptance” is used but I prefer to use “welcome” because in the term “acceptance” I see an undertone of effort and resistance that completely disappears when mindfulness was born.. what was previously opposite (unaccepted, unaccepted) was not only not against me, but maybe FOR me, for my own good if I just change my gaze to that thing.

Obviously, the premise of this whole project is to invest in efficient and well-diversified instruments, which will surely recover once the problem that caused the markets to collapse is resolved. If there was a portfolio invested right now in Russian bonds, it is clear that all of this would become pointless.

Alessandro Pedone, responsible for the Aduc for the protection of savings

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