After reading my previous blog post “The Other Guy is Risk”, the question that arises is, “What do we do about it?”
I define risk as a question: “What will the other guy do?” In the market, the other guy’s actions are unpredictable and could cause us to lose money. The other guys are the mutual funds, large investors, and the sum of all the small investors out there who behave with herd mentality at some price point. If they start selling, our investments will go down. This is our risk.
To avoid losing money there are a couple of things we can do. The first is to play by our own rules and ignore the other guys. This works when we know we are not going to need the money we have in the markets for many decades. Between now and then, large fluctuations will occur. If we can remind ourselves that we are playing by our own rules and ignore the market, then we can stay with this strategy. This strategy is called buy and hold.
Using the buy and hold strategy takes a mental and emotional combination of traits that most people don’t have. It is not easy to see one’s investment account lose 40% of its value and be able to ignore it.
Another difficulty comes when we no longer have decades until we need the money. As we approach retirement, our children reach college age, or we have other expenses, we can no longer ignore the other guys. We need a method to manage the risk of the other guy selling, not just ignore it.
More on this strategy later.