Reframe Finance #3

Freedom facts, antifragile investing, market timing

Hello friends,

Here is your weekly dose of financial wisdom. This edition is dedicated to making peace with uncertainty.

Freedom Facts

  1. On average, corrections have occurred about once a year since 1900.

  2. Less than 20% of all corrections turn into a bear market.

  3. Historically, bear markets have happened every 3 to 5 years.

  4. Nobody can predict consistently whether the market will rise or fall.

  5. Bear markets become bull markets, and pessimism becomes optimism.

  6. The stock market rises over time despite many short-term setbacks.

Antifragile Investing

This week I came across Nassim Taleb’s idea of antifragile investment portfolios. Something that is antifragile benefits from disorder. He recommends using the barbell strategy to achieve this:

  • Allocate 90% of your capital to low-risk assets (cash, gold…)

  • Use 10% for high-risk investments (start-ups, options…)

The idea is to have limited downside and unlimited upside. This portfolio is antifragile because the high-risk investments can potentially catch positive Black Swans (rare high impact events) while the maximum loss is capped at 10%.

The Middle Way

The opposite of the barbell strategy is to allocate all capital to “medium” risk assets like stocks. The rationale against this strategy is that it is harmed by disorder and thus fragile. Indeed, it carries the risk of losing everything.

However, the logic behind consistently buying ETFs over a long period is that it allows you to gain from compounding. Nonetheless, this strategy exposes you to significant volatility and the key to remain calm is to not make emotional decisions. The best way to do that is to automate your investments.

Time in Market

With the latter strategy in mind, the biggest danger isn't a correction or a bear market, it's being out of the market. Sitting on the sidelines even for short periods of time may be the costliest mistake of all.

As you can see time in the market is more important than timing the market.

Think for Yourself

Among the numerous profitable investing strategies, none is universally perfect. You must know yourself and find what strategy works for you. I think this is best achieved through experience, independent research, and thoughtful disagreement.

To independent thinking,

Alex Vikner