You MUST ask yourself this question

By Morningstar |  02-04-20 | 

Mohamed El-Erian has some excellent advice for individual investors.

He is currently the chief economic adviser at Allianz, the parent of Pimco, where he formerly served as chief executive and co-chief investment officer.

What to avoid: Extreme Behaviour

A lot of the conventional wisdom investment remains valid.

One of the things that individual investors have to be careful of is extremes. We are being taken out of our comfort zone in so many ways, not just in terms of what we are seeing happen to our investments, but also in terms of what we're seeing happen to ourselves, the whole range of normal daily life has come to a halt. So, we are way out of our comfort zone.

Two reactions that are particularly pronounced in the financial markets is either paralysis or overreaction.

It is critical for the individual investors to understand that it is natural to feel unsettled. It is natural to feel uncertain. It's the reality we are living in, and to fight that tendency to either completely be paralysed or overreact.

Question to ask: Which mistake can I least afford to make?

That is the most pertinent question that each individual investor has to ask, and honestly answer.

NOT, what will go well for me? BUT, which mistakes can I not afford to make?

In this uncertain world no one can predict the likelihood of mistakes. No one wants to make a mistake. But the likelihood of making a mistake has gone up.

Most mistakes are recoverable. We discovered that in 2008. So, the question is, which mistake can I not afford to make?

That's a question that every investor should be asking themselves when they look at their asset allocation. And it speaks to their tolerance for risk, their tolerance for volatility and also, what is the time span they think of in terms of their investments.

Principle to follow: Regret Minimization

Once you've answered the above question, guide your decision by regret minimization. You will face trade-offs. Do I leave money on the table or do I protect my portfolio? Do I sell when prices have gone down so much or do I wait till I get a bounce?

These questions can only be answered at the individual level. But ask yourself the regret minimization. If I end up making a mistake, which again, I don't want to make, but if I end up making a mistake, which mistake will I regret less.

How will the above help?

Having managed other people's money through very, very turbulent times in emerging markets, I have found that the above can help navigate and simplify what is an enormous complexity.

The average person out there is not just trying to drink from one firehose. They are trying to drink from a suite of firehoses.

One firehose has all the information that's bombarding them every day about the market, their portfolios, and people seeing things they've never seen, the fastest correction in history, the biggest outflows from mutual funds and investment grade, somethings we've never seen. It's literally a firehose of information about markets, your portfolio.

Then there's a second firehose, which is what's happening to our daily lives. Can we go out? Can we interact? Can I find supplies? And we're having to internalize this second firehose of information about fundamentals, what's going on in the economy.

And the third firehose, if two weren't enough, is policies. Literally, every hour, we have yet another emergency policy intervention. It's hard enough to drink out of one firehose.

It is virtually impossible to drink out of three firehoses. So, simplifying things to make them actionable can help a lot. And then, the time will come to go back to a paradigm when we can actually take in all this information that's around us.

Mohamed El-Erian shared these insights with Jeff Ptak, Morningstar’s global director of manager research. You can read more of his views here:

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