I'm going to offer a perspective that many investors might not think about on a day-to-day basis: the idea that investing is not just picking the right stocks, but so much more. Here are the main components involved:
* \#1 - **Asset Purchased** (stocks, ETFs, bonds, etc.)
* \#2 - **Portfolio Allocations** (5%, 10%)
* \#3 - **Effectively Managing Risk**
* \#4 - **Building and Maintaining Conviction**
* \#5 - **Developing and Consistently Revisiting an Investment Thesis**
* \#6 - **Upstream Capital Allocation** (which accounts do I manage and why?)
**#1: Asset Purchased**
Investors should determine their level of comfortability with the different classes of assets available for them to purchase. The general risk curve for assets include cash -> fixed income -> equities -> more speculative assets. Within each class, one can then choose to develop a more sophisticated portfolio of assets. Do you want a mix of individual stocks and ETFs? A full-stock portfolio? 60/40 stocks/bonds? This one is the most obvious consideration but one of the most important investing decisions you'll ever make regarding your capital growth or loss.
**#2: Portfolio Allocations**
Once a portfolio is comprehensively planned out, investors can more precisely manage risks or volatility by balancing asset allocations. For example, if you want to invest in a moonshot bet (**$ASTS**, **$OKLO**, or **$VRT** for example), you can still significantly benefit from share price appreciation without taking on significant portfolio & capital risk. A **1-2% position** can often suffice here.
Some investors choose to make their largest positions the ones that are most likely to preserve their capital over the long run. Others (myself included) prefer to also size up positions in which you have higher conviction. If the position drops, I am much less likely to sell out of fear. In fact, I am more likely to increase my allocation, understanding that rather than believing it to be a poor investment, understanding it is the same investment for cheaper than it was yesterday.
**#3: Effectively Managing Risk**
Many investments carry risk. This ties in nicely with the above section because much of this can be done through setting clear capital allocation priorities.
If 100% of your cash is in a speculative asset and it drops 25% in one day, that is a quarter of your net worth that you lost. Great investors understand this dynamic and carefully curate portfolios to ensure their capital grows consistently over time. Those that don't may still become radically wealthy, but *is it worth the risk of permanent capital loss*? For every 1 person that achieves this, 3 may not.
**#4: Building and Maintaining Conviction**
To be honest, this is the one I think warrants the most attention. One of the most dangerous investing activities is borrowing conviction from someone else. If someone tells you an investment will be very profitable one day, but don't investigate for yourself why, then your investment decision hinges on their research and beliefs. If the stock drops 30% over a matter of weeks, you start to question their decision and may sell, leading to a permanent loss of capital.
To be able to hold through the ups and downs, one must believe in ***why*** the investment will be a sound one. Whether that means industry and company research, fundamental analysis, or a comprehensive assessment of management, it must make sense to you. I've found having a system to track your investment theses across all positions gives you the best chance at this long-term conviction.
**#5: Developing and Consistently Revisiting an Investment Thesis**
Things change. Information available three months ago might not be relevant now:
* **New competitors** may have entered the market
* The company may have transitioned to **new management** with different capital allocation priorities
* **New technologies** may have released, rendering a certain products obsolete
* ... and many more
While focusing on the long-term may require a healthy balance between consistent research and ignoring the short-term noise, revisiting a thesis every once in a while and re-thinking your original reasoning never kills you.
**#6: Upstream Capital Allocation**
So you are invested. Is this in a brokerage? A Roth IRA? An HSA? More than one?
Have you considered whether you want different strategies in different accounts?
Have you considered the contribution limitations of each?
These are all important factors when you decide how much money to store away for investing, and where that money goes. For example, if you deploy a dividend-heavy strategy in a taxable brokerage account, you will likely be taxed at a significant rate on all these dividends. But in a Roth IRA, you won't. On the other hand, you may feel more secure if you use a retirement account such as your Roth IRA to invest in low-cost index funds, but use a brokerage accounts to play around with some capital in individual stocks.
You must determine for yourself what allocation and strategies you are comfortable with. Tax becomes a real motivator here.
**Summary**: Investing seems simple in practice but comes with many more considerations than meets the eye. ***What other considerations are missing here? What do you all do when deciding on these factors?***