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Murphy's Law and Investing


Long gone are the days of being able to only invest in bonds, stocks or commodities. The world is constantly evolving at an incredibly fast rate, and the investment industry seems to be keeping up with the pace. Investing in the 21st century is no different to walking into a buffet restaurant and being spoilt for choice. In a world where you could make money off Crypto Currency, Foreign Exchange, Non-Fungible Tokens, Binary Options and Sneakers through your cellphone, it is not hard to see why everyone from your next-door neighbor to your mom is talking about investing.

Murphy's Law

With so many opportunities to make money, what could possibly go wrong? Edward A Murphy was an engineer that worked for the United States Air Force. In 1949, while working on project MX981, a test designed to see how much sudden deceleration a person can withstand during a crush, he came up with what is famously known as Murphy's Law. The law states "Anything that can go wrong, will go wrong".

So, what does Murphy's law have to do with investments? In the design of portfolio construction, you need to ensure that there are fewer things that can go wrong, to deny them the opportunity to go wrong. Being a successful investor takes discipline, patience and most importantly knowing when to say no to "the next big investment opportunity." Often, investors find themselves taking on trade opportunities they know nothing about and end up selling 6 months down the line at a loss.

Unpredictable Short-Term Markets

The truth is, markets in the short term are unpredictable. 6 months is not enough time for your investments to compound to the point where your portfolio becomes a money-making machine. The more you actively trade the higher the chances are that something will go wrong eventually. On paper, you may be down hundreds of dollars in the short term, but those losses are not realized unless you sell. This may seem counterintuitive, but your best option when markets take a turn for the worst is to buy the dip. This stacks up the value of your investments at a lower stock price and allows for greater compounding in the future. If you wait for things to get better, chances are that the ship has already sailed.

Regret Minimalizing

In "A Wealth of Common Sense", a book by Ben Carlson, he mentions that investing is about regret minimalizing. Some investors regrade missing out on huge gains, while others regret participating in huge losses. At its core the book addresses how, investors should account for Murphy's law. When you are faced with the fear of missing out on the next GameStop or the temptation to sell at a loss, what does your investments strategy say? To quote Mike Tyson, "Everyone has a plan until they get punched in the face". Winners and losers in the market are determined by what you do after that blow lands.

Frequency in Contributing

Murphy's law tells us that we should have accounted for the possibility of that happening and have a strategy on how to navigate it if it were to happen. Your ability to accumulate wealth in your lifetime is strongly determined by how frequently you can contribute to your investments and not by timing the market through buying low and selling high.

To prove this, Peter Lynch did a study on Fidelity Investments and looked at a 30-year period from 1965 to 1995. He found that if you had invested every single year on the lowest day of the market you would have earned a return of 11.7 percent annually. Had you been unlucky and picked the high day every single year, your return would have been 10.6 percent annually. Using the rule of 72 in this example, it means the former is doubling their money after 6.15 years (72/11.7=6.15 years) and the latter after 6.79 years (72/10.6=6.79 years).

Timing the Market Can Do Harm

In the long run, timing the market is likely to do more harm than good to your portfolio. Wealth accumulation requires discipline and patience, but to a larger extent your ability to get rich heavily relies on how consistently you can contribute to your portfolio. Taking it back to the question, "What does Murphy's Law have to do with investing?", the answer is EVERYTHING! Leaving your investments to chance is a fool's game. It is unwise of you to let chance become the determinant variable that drives the outcome of your portfolio. Having a plan, understanding that the market is irrational in the short term and contributing frequently could take you a long way when it comes to meeting your retirement income goals.

Article in one Sentence: You don't rise to the level of your goals, you fall to the level of your strategy.

- Kondwelani Kalinda, Administrative Assistant

- Grant White, Investment Advisor/Portfolio Manager

Kondwelani Kalinda is an Administrative Assistant at Endeavour Wealth Management with iA Private Wealth, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Kondwelani Kalinda who is a Administrative Assistant for iA Private Wealth and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.

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