[Sad News] Mr. Dario suffers 20% loss, breaking the "diversified investment myth"
Hello, this is Gesha (Shimoyama).
Recently,
There were reports that
Ray Dalio's fund was down 20%.
Even Mr. Dalio himself could not endure the recent sharp drop,
it seems.
What we should focus on
is the strategy that was used.
According to an article in the Nikkei Newspaper,
Dalio employed a strategy called the "Global Macro,"
often referred to as "diversified investing."
↓
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This fund is classified as
a strategy that makes investment decisions based on economic forecasts
and is called "Global Macro."
According to Dalio's book "Principles,"
its original design philosophy was to broaden investments across assets such as stocks, bonds, and commodities
that do not move together in price,
so that the strategy could generate profits regardless of market conditions,.
（omitted）
Even during the Lehman Shock in 2008,it secured a 9.4% return.
In nearly 30 years of operation, only three years had negative annual returns,
and those were only small amounts.
（Nikkei newspaper, 2020/3/16：
https://www.nikkei.com/article/DGXLASFL16HFP_W0A310C2000000/
quoted)
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Even during the Lehman Shock, a superior strategy continued to generate profits...
It should have been an excellent strategy, but...
it seems it could not withstand this time.
In the financial industry,it is a highly trusted strategy,
so this news must have shaken the financial industry greatly,
I imagine.
Among the readers of this newsletter,
some may be building a portfolio with
“non-correlated products”to spread risk,
but this news may force a reconsideration of the strategy.
As long as all asset prices do not drop to zero simultaneously,
there is no such thing as an “absolutely safe diversified investment.”
For those who trade diversification as a strategy,
I strongly recommend re-evaluating the associated risks.
“If you want to trade with risk minimized and safely,”
for example, how about holding both a buy and a sell for a single asset?
Then,
whether the market crashes or surges,
you can ensure risk hedging.
I personally believe that is the most rational wayto avoid risk,
and I actually trade stocks based on that idea.
Of course,even in the recent sharp declines
I have not suffered large losses,
and I have continued to earn steady profits as usual.
Which strategy you adopt is up to you, butthink rationally and
please adopt a strategy that you can be confident will manage risk.
If the market moves unfavorably, what will you do?
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However, no method can eliminate risk entirely,
no matter what technique you use.
Even with a strategy of holding a long and a short position on a single asset,
in order to profit you cannot keep the same number of contracts forever.
You must balance buys and sells.
If you let the balance tilt and a market crash occurs,
you may suffer large losses.
Therefore, what matters is
“If the market moves unfavorably, what will you do?”
andpositional planning in advance.
Before tilting the balance, you must pre-consider
“What will you do if the market moves strongly in a direction opposite to what you anticipated?”
and prepare in advance.
I,before taking a position, always think
at least two or three steps ahead.
That is why,no matter the situation,
I can respond calmly.
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Psychologist's recommended “Deathbed Scenario Analysis”
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Thinking two or three steps ahead,
and more importantly,
even imagine, for example, a year from now
and consider it in advance, is effective.
Of course,
I am not saying you should literally plan a year ahead,
nor that you should always think about what you will do a year from now.
What I want to recommend here is
“Imagine a year from now you have suffered a major loss and are forced out of the market,
and think in advance about the reasons for such an outcome.”
That might feel odd.
Just hearing that may not be convincing, but
the idea is to imagine, a year from now, you have suffered a major loss and
identify in advance the reasons for it.
This is the method recommended by American psychologist
Gary Klein,
and is called “Deathbed Scenario Analysis.”
In other words, it is a psychologically acknowledged method.
Gary Klein says:
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“Imagine it is one year from now.
We implemented the plan described in this material,
but the result ended in a big failure.
Please spend 5 to 10 minutes writing down how the plan failed.”
The fictional story written there will illustrate how a project might unfold.
Rolf Dobelli
‘Think Smart (Sunmark Publishing)
First edition January 12, 2020
P.92
＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝＝
Here it is presented as a project, but
one year from now,
suppose you suffer a loss so severe that you are forced out of the market,
and analyze why such a result occurred
to gain a great insight.
By seriously thinking about the reason for a major failure,
you can realistically recognize actions to avoid.
Unfortunately,many individual traders
are full of profit expectations before they even start trading.
For example, when the stock price crashes,
they think, “This is a big bargain!” and jump in,
the price falls further,
they cannot endure it, and end up losing big.
If you enter carelessly, you will surely regret it someday.
What about you?
Do you imagine the possibility of taking a big loss and being forced out of the market,
and have you prepared in advance how to respond?
Watching this recent plunge highlights the importance of this in a true sense.
Thank you again for reading today until the end.
Shimo-yama Keizou
