"Every battle is won before it is ever fought" Sun Tzu, Art of WarThe single most important trait to being a successful investor is being able to control your emotions. It doesn't matter how high your IQ is, where you went to school or how long you've been an investor. It all takes a backseat to being able to execute your plan and not an making emotional decision, such as selling at the bottom of a market-cycle because you can't take the pain anymore. Unfortunately, us humans have been mentally hard-wired over many millennium to react immediately to the world around us. It's how our ancestors survived in lands full of lions and other predators. This trait, reacting before thinking, is what causes so many investors to massively under-perform the stock market.
My advantage here at Solitude Canyon isn't that I'm a Super-Human with the ability to suppress my emotions (big surprise right?). Rather, I'm entirely too aware that I'm a weak-minded, fallible human with the exact same emotional liabilities everyone else has. To counteract this deficiency I utilize an objective trigger point, by selling a portion of stocks should the S&P 500 break it's 200-day moving average (DMA).
As you can see in this five-year chart, if an investor followed this discipline in December 2007, they would have avoided a big chunk of the nasty sell-off in 2008 and early 2009. Of course, this strategy doesn't always work out. In 2010, the average bounced around the 200 DMA and invoking the 200 DMA rule would have been nothing but a drag on the portfolio. But I'm willing to accept that to avoid getting accounts crushed by a nasty, long bear market. Because that's when huge, life-altering mistakes get made like selling in February 2009 and missing-out on a 100% gain.
I'm bringing this up because stocks have tumbled nearly 10% from it's recent high and the S&P 500 is just 17 points away from the 200 DMA. Hopefully, it won't get breached but if it does I'll reduce equity exposure. What's your plan?
