here's why your investing strategy will change (and what you should do about it)
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Announcement
Let’s talk about the Amazon split last week and how it affects your position.
Amazon ($AMZN) recently did a 20:1 split and some investors are confused about what this actually means.
The share price went from ~$2,460 to ~$123. But this DOES NOT mean you can now buy Amazon stock at a 95% discount.
If you owned 1 share of Amazon, you now own 20 shares just at a lower price. Your ownership percentage remains the exact same.
For all of you investors who believe that NOW is the time to buy Amazon stock because it’s “cheaper”. Nothing fundamentally has changed about the stock. Sure the stock price is “cheaper” but with access to fractional shares, accessibility to expensive stocks like Amazon is easier than ever.
Why your investing strategy changes over time
I recently finished the book The Psychology of Money by Morgan Housel and if you have not gotten the chance to read it, I highly suggest you do. The book covers a wide range of financial topics many retail investors struggle with and Morgan does a great job of communicating his points by using stories of financial successes and failures.
If you’re not much of a book reader, this issue of The Profit Zone will be a highlight of one of the chapters that I found incredibly interesting, as well as something I feel the need to share with you. The topic we are about to cover is something I’ve never put much thought into but makes a lot of sense as a long-term investor. Let’s begin!
People are poor forecasters of their future selves
When you were young what did you want to be when you grew up? Maybe a police officer, a firefighter, a truck driver or even Batman. Kids have crazy imaginations but their ideas of their future selves are based on very little knowledge of who they are and what they like.
Then as you grow into your teens, you start to gather an understanding of how the world works and you start developing interests and likes. That idea of who you thought you would become changes. Maybe now you want to be a lawyer, or an engineer or maybe even a portfolio manager at an investment firm. But then once you immerse yourself in that world, you start to realize that it’s a lot of work. Maybe more work than you had originally thought, and it’s taking away time from the things you enjoy most like traveling, hanging out with friends, or going to the movies. So eventually you decide it isn’t for you. And who you thought you would become completely changes once again.
Now you’re middle-aged, with wife and kids. You’ve decided to settle down with a job that gives you the benefit of making some money (maybe less than a profession as a lawyer) but you now have more time to spend with your family. This all comes at a cost. Because now you’re nearing retirement, and you’ve realized you haven’t saved enough money to live comfortably.
So that kid who thought he was going to be Batman, turned into that teen who thought he was going to be a lawyer, who turned into that middle-aged man who wanted to spend more time with his family and sacrificed income, who turned into that elderly man who realized he didn’t make enough money during his working years.
You will change. Nothing is set in stone. This is fact. And it’s important that we embrace change as much as we possibly can.
I’ve never actually taken the time to look at my investing strategy this way. I always studied how your allocations change over time, but never the strategy itself.
For example, when you’re younger you’re taught to take on a bit more risk whereas when you’re older you’re taught to be more conservative and generate income from your investments.
That’s all fine until your investing preferences change. We don’t know WHO we will be 10, 15, 20 years down the road. All we have are illusions of what we COULD be or SHOULD be that are being formed by who we think we are in the present moment.
Right now, I’d consider myself a dividend investor. My portfolio is made up of about 60-70% dividend stocks and ETFs. But will I still be a dividend investor in 20 years? I have no idea. I’d like to think I will because I believe in the power of compounding over time, but in reality, I have absolutely no idea who I will be down the road.
Morgan Housel said:
“Young people pay good money to get tattoos removed that teenagers paid good money to get. Middle-aged people rushed to divorce people who young adults rushed to marry. Older adults work hard to lose what middle-aged adults worked hard to gain”
Change is inevitable.
Compounding works best when you give it years to grow
One of the reasons Warren Buffett has accumulated so much wealth is because he’s one of the few examples of people that have never interrupted compounding unnecessarily. Imagine how much wealth you’d accumulate if you stuck to the same strategy for 60+ years. Most people can’t do this and it’s not reasonable to believe that this is common.
We should be open to change at any given moment. The most miserable people are those who stay at a job for too long just because it’s comfortable. You could say the same about relationships. I stayed in a 5-year relationship because of this exact reason. It’s dangerous to yourself and those around you. Invite change. Accept change. And move on.
Have no sunk costs
According to Investopedia, a sunk cost “are those which have already been incurred and which are unrecoverable”.
Having “no sunk costs” means not letting your future self be a prisoner of your past different self. It would be foolish to rely on a different version of yourself to make the right financial decisions for today. There is just no way you could predict exactly the financial situation you would be in.
So when Morgan Housel says have no “sunk costs”, he means everything is recoverable but more importantly, adjustable and variable. The goals you set when you were 20 might not be relevant when you’re 50. Don’t be so stubborn that you neglect change. The faster you embrace it, the quicker you can get back to compounding.