One framework for investing is the bathtub model. Individuals (but also managers of OPM like pension funds, endowments, etc.) aim to fill the tub as much as possible. An individual’s main stream is their salary. Maybe some salary first goes to an investment, and then pours in the tub. A rental property, a second job, a military retirement are inputs too.
But the tub doesn’t just fill up, it drains too. Losses in the market are like leaks in the tub, hopefully we can mop these up and dump them back in. The big four unexpected costs: health, house, job, spouse are major leaks. Retirement is the intentional draining of the reserves.
More water and more pressure is good. Fewer and less severe leaks are good. One way to add on net are uncorrelated assets. What flows faster as something leaks more? Real estate and gold are classic examples. Bitcoin too – kidding! ‘All weather’ and ‘cockroach’ are portfolios which blend assets for uncorrelated returns. The goal is to prevent major mop ups or total losses.
But the best and only uncorrelated asset is mindset.
A common mindset during drawdowns for investors who dollar cost average is that stocks are on sale. This attitude goes beyond investing. When something bad happens it’s a chance to get stronger. Another is, you’ll have a great trip or some really good stories.
The world is complex. There’s a lot going on, sure. But also ‘a butterfly flaps its wings in Kansas and causes a Tsunami in Guam’ complex. How does someone plan for just what’s happened since 2016?! How do investors (but also managers of OPM like pension funds, endowments, etc.) find that someone? Not only is our mindset the best and only uncorrelated assets, it’s ours to control. We can want less or more. We can view the obstacle as the way. We can match expectations to reality.