Although no one can predict the future, we can all plan for it. This is one of the most important aspects of investing. Before opening a trade/making an investment, I spend as much time thinking about what will make me close it, as I do about researching the idea in the first place. Investors seem obsessed with finding fantastic investment ideas and give little thought about what may happen to them. As a result, they often do not behave sensibly when the price wobbles.One of the great advantages of being a private investor is you don't have to be pushed around by the vagaries of the markets or other people. The key to staying calm is to think through each investment, both individually and as part of your portfolio. Let's go through an example. At the moment, the market looks toppy and I don't think anyone would be surprised if 30-40% was wiped off the value of equities in the next few years. So do you buy or sell now? The answer lies in the old adage of expecting the best but preparing for the worst. I'm 80% invested in equities and 20% in cash, not including property or commodities. If and when the market falls, I will use the cash to add to my positions. Why 80% invested? The honest answer answer is, it feels right for now. The only thing I know for certain is that I want to be fully invested near a market bottom. It's tough opening your broking accounts and seeing a large loss. Bear in mind though that you're buying real companies and remember what Ben Graham had to say about Mr Market.
It's funny that in all the years I've spent reading about investing, very little is written about this aspect of it. To me it's the most important part. I guess I follow Kenny Rodgers advice when he sung about the gambler and something about there's no such thing as a good or bad hand, just the way you play it.
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