Learn How To Not Lose

A quote attributed to Nassim Taleb that I hadn't seen before; it takes five years to learn how to make money and twenty-five to learn how to not lose it.

This resonates with me as I see how my beliefs about money have evolved as I have gotten older. I'll be 55 in a few weeks and will post more about that when the time comes but an important part of engaging with your investment portfolio is to understand not just the risk you are taking but the consequence of that risk if something goes wrong. The ARK Innovation Fund (ARKK) has been dominating the news lately. First for going up so much and then for going down so much. The fund is behaving exactly how I would expect it to, exactly. It tends to go up more than the broad market during uptrends and down more than the broad market during down trends like we're going through now. If you have even a vague familiarity with the fund then you already know this.

If the stock market ever cuts in half again (it probably will again at some point) then I'd expect ARKK or other similarly oriented funds to fare worse than cutting in half. If you're 70, retired, drawing from your portfolio as part of your retirement plan then how much should you have in a fund with that kind of potential volatility? That of course is up to the end-user, there can be no single answer but if you have a position so large that you succumb to emotion after a 50-60% decline (it was down 40% briefly last spring) then the extent of the damage will depend on position sizing....that is knowing how not to lose or more precisely how not to have a loss materially impact your portfolio.

Materially impact is also dependent on the end-user but a 20% allocation that drops by 60% that is then sold at a low point might qualify as materially impactful. Compare that to a 5% allocation dropping that much. The pain could be measured in basis points and while that pain might be just as bad, the impact will not be. Even then, 5% might be a high starting point in the context of learning how not to lose.

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