Mike Tyson is one of the greatest boxers of all time. But his career was volatile.
Iron Mike, as he was known, won his first 37 fights as a professional. He was so good, almost every Las Vegas casino refused to take bets on his next fight.
Then, one fight set the odds. Tyson was a 42-to-1 favorite in his match against Buster Douglas. But he lost that fight amid rumors that he was socializing more than training in the weeks before the bout.
From that point on, his career seemed like an unscripted reality show. It was as if Tyson no longer controlled his life.
He explained the situation in terms investors need to remember. Tyson said: “Everyone has a plan until they get punched in the face.”
Here’s how investors also get punched in the face.
Don’t Let the Market Knock You Out
For investors, a bear market is a punch in the face. When I managed money, I quickly learned that plans get tossed aside when that first punch lands.
As a registered investment adviser, our firm was required to understand the clients’ risk tolerance. We did this with an industry standard quiz that asked questions such as:
Let’s say your retirement account declines by 15% in one year. Which of the following are you more likely to do?
(A) Change the portfolio. If a portfolio goes down 15%, it’s obviously too risky for me. This would keep me awake at night.
(B) Stay the course. I have a long-term perspective. I understand that my portfolio can decline in the short term, but I’m willing to accept short-term losses if that’s what it takes to earn higher long-term returns.
In the office, if everyone selected option B, then the portfolio drops 15%. And clients call asking how they could lose so much money.
In other words, they had a plan until they took a punch.
For investment advisers, the client is always right. After a decline, many change their portfolio to decrease risk. This is often done by adding fixed-income investments to protect capital.
Then, the stock market goes up by 15%. But the more conservative portfolio fails to deliver gains.
That’s the second punch in the face, and it’s one investors find more difficult to shake off. After underperforming, they are anxious but also afraid to make a change.
So they wait for a pullback. When there is a pullback, they worry the decline will continue. As the market moves, they are paralyzed with fear.
The best thing they could have done was avoid that first call. They should have stuck with their original plan.
How to Invest Like a Champion
While this lesson is timeless, it’s also timely. The recent pullback in stocks increased anxiety for many investors. Some are thinking about changing their portfolio. That would almost certainly be a mistake.
If you are a long-term, buy-and-hold investor, then you should do nothing.
If you have a plan for volatility, then you should follow that plan.
And if you don’t have a plan, then now is the time to make one. Of course, it can be challenging to stick to a plan when the market is down. That’s why each week, my colleagues and I share our insights and trader expertise at Smart Profits Daily to help keep you on track.
So just remember. When Mike Tyson trained hard for his fights and stuck to his plan, he was the heavyweight champion of the world. But when he got distracted, a punch to the face threw him off his game.
Successful investors know to avoid the mistake that derailed Iron Mike’s career.
Editor, One Trade