“Capital markets are about making the best probabilistic decisions using imperfect information about an unknowable future,” he adds. Eminent author and equity analyst Barry Ritholtz says even the greatest trading strategy is worthless if investors lack the discipline and the emotional resilience to stick with it.

Ritholtz says investors should consider a globally diversified portfolio, including asset classes that are less correlated to equities such as corporate bonds , treasury inflation-protected securities and treasuries.

“A portfolio that is 60 per cent equities and 40 per cent fixed income should suffer drawdowns of about 26-28
per cent in markets that get cut in half, such as 1973-74 or 2008-09. If you cannot live through a 25 per cent pullback in the value of your portfolio, you have no business owning stocks ,” he wrote in a column for a financial website.

Barry L Ritholtz is the co-founder, chairman and chief investment officer of Ritholtz Wealth Management LLC. His career’s focus has been on decoding how the intersection of behavioral economics and data affects investors.

Ritholtz did his graduation at Yeshiva University’s Benjamin N. Cardozo School of Law in New York, where he focused on economics and antitrust & corporate law. Launched in 2013, Ritholtz Wealth Management is a financial planning and asset management firm, with over $2.3 billion in assets under management. In 2017, the firm was
named ETF Advisor of the Year. In 2019, it was on the Financial Times Top 300 Advisors list in the US for the 3rd consecutive year. Ritholtz writes weekly columns for Bloomberg Opinion and used to write a twice-monthly column on personal finance and investing for The Washington Post (2011-2016).

Investment strategy

Ritholtz says the top priority for investors should be capital preservation and risk management. He uses behavioral economics and asset allocation to build and manage portfolios. Financial planning and wealth management should be intertwined for investment success.

Though Ritholtz says long-term returns are what should truly matter to investors, he understands investors have short-term needs also. To maintain a balance, he suggests a proprietary, low-cost, systematic risk management strategy to ensure that investors can handle periodic volatility without abandoning their investment plan.

In a blog, Ritholtz has shared some top trading rules that he had learnt over the years on what to and what not to do when it came to investing in the capital markets. Let’s look at some of these rules:

1 Hold onto your winners and cut your losses short

Ritholtz says investors should hold their winners as these can generate all kinds of desirable outcomes — like it can allow compounding to occur and keep transaction costs, fees and taxes to a minimum. He says since this strategy does not allow investors to make a quick profit without any reason, it also forces them to develop an actual exit strategy.

Similarly, he suggests cutting losers short as this makes investors humble and intelligent. Also, it takes investors away from the sectors and stocks that are not performing and compel them to admit their own mistakes which is crucial.

2 Avoid making predictions and forecasts

Ritholtz says investors are very bad at guessing what the future will bring so they should ignore other people’s forecasts. Investors should also avoid making any forecasts themselves because that makes them focus more on being right than on making money.

“Investors unconsciously shift their portfolio toward their predictions rather than with what is occurring in the markets. This is a recipe for disaster,” he says.

3 Study crowd behaviour

Investors who understand the behavior of crowds have an enormous advantage over those who don’t. Investing often involves figuring out where the crowd is going, even if it’s objectively ”wrong.” “Investing isn’t necessarily a process of picking the best asset class, sector or stock, but rather, selecting what the crowd is buying. Investors
sometimes forget that, most of the time, the crowd is the market. The psychology of crowd behavior is such that higher prices attract more buyers — and lower prices create sellers. Fear of missing a rally is a powerful element; fear of losses is even stronger,” he says.
4 Think like a contrarian Ritholtz believes the crowd can be overly emotional, fickle or even irrational at times. So investors should be contrarian and learn to recognise when a crowd can turn into an undisciplined mob. When that happens, it’s time to stop betting with the herd, and start betting against the crowd.”Most people accept conventional wisdom at face value, tend […]

source Barry Ritholtz’s 12 tips on how to successfully steer through the world of stocks

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