Getting comfortable with larger sums

[mikazo]

Hey everyone,

 

I was just curious, did anyone have trouble with getting comfortable investing progressively larger sums of money? Does anyone have advice for dealing with this change? Did it make you invest more carefully when you went through this process?

 

I have been value investing for a few years now, but only ever with a few thousand dollars. Now that my wife and I are in better positions to save more money, I will have more cash to invest and larger position sizes over time.

 

I trusted my convictions enough to invest say, $1000 in an idea, as it would be possible to recover from that kind of loss if I turned out to be dead wrong. But with larger sums, I worry about whether I should be more cautious.

 

Just curious what others think. Thanks.

[no_free_lunch]

I have the same problem and am curious what others think as well.

 

My main strategy has been to keep a substantial portion in index funds.  I also am not too concentrated (12-15 positions).

[racemize]

I just tried from the very beginning to consider everything in percentages, and not the actual dollar amounts, and mange the money the same way indefinitely.  As a result, I haven't noticed much of a difference from starting at the thousands of dollars to moving to the hundreds of thousands of dollars.

 

I'm not sure how helpful that is, as it was just a mindset I tried to get in before the sums got big.  It may evolve when it gets even bigger, but I'm not expecting it to at this point.

[merkhet]

I just tried from the very beginning to consider everything in percentages, and not the actual dollar amounts, and mange the money the same way indefinitely.  As a result, I haven't noticed much of a difference from starting at the thousands of dollars to moving to the hundreds of thousands of dollars.

 

I'm not sure how helpful that is, as it was just a mindset I tried to get in before the sums got big.  It may evolve when it gets even bigger, but I'm not expecting it to at this point.

 

Exactly this.

 

It's natural to be a little worried when the sums become bigger, but keep in mind that it's always been and always will be a percentage of your savings anyway -- regardless of whether it's $1,000 (out of $10,000) or $100,000 (out of $1,000,000).

[randomep]

I just tried from the very beginning to consider everything in percentages, and not the actual dollar amounts, and mange the money the same way indefinitely.  As a result, I haven't noticed much of a difference from starting at the thousands of dollars to moving to the hundreds of thousands of dollars.

 

I'm not sure how helpful that is, as it was just a mindset I tried to get in before the sums got big.  It may evolve when it gets even bigger, but I'm not expecting it to at this point.

 

Exactly this.

 

It's natural to be a little worried when the sums become bigger, but keep in mind that it's always been and always will be a percentage of your savings anyway -- regardless of whether it's $1,000 (out of $10,000) or $100,000 (out of $1,000,000).

 

Right and returns are just percentages regardless of how much your principle is. Numerous times I have heard people say something like oh seaboard is $4000 it is expensive. I cannot fathom what is their logic.......

 

 

[writser]

I agree with the above sentiment. Just suck it up and think in percentage terms. You could diversify a bit more to get closer to market returns if you're unsure about your investing capabilities (which I think is the _actual_ problem, not the size of your portfolio).

 

Also, you will get used to the extra digit in your account faster than you would think.

[oddballstocks]

In a weird way I'm more comfortable with larger sums.  It does two things for me:

 

1) It's a gut check on if I really like an idea.  If I'm thinking "oh I'd toss $1,000 at it but won't toss $5,000 or $10,000 at the idea" I need to re-evaluate and consider why.

2) The larger positions make a difference.  I remember when I started investing in my Roth out of college and invested $600 in a position.  It grew by 20% or so and I remember thinking "only $120?"  With a $10,000 position if it grows 20% that's equal to a $2,000 position from a few years ago.

 

Like others said the key is percentages.

[DavidVY]

- Think in bankroll units/chips. So % like other said

- Diversify into more positions as your wealth increases.

- Don't put more into the market than you can lose. If it goes down 75% tomorrow, will your standard of living drastically change.

 

Thats what all the big boys have said, and I agree with them.

[benhacker]

I actually think part of the challenge of this mentality, is that thinking % wise, actually means you should diversify more as you get bigger, because when you are young / poor / small, the dollars you invest are a small portion of your lifetime income (including salary).

 

Few of us include our NPV of salary income in our portfolio, but I think our minds do it subconsciously.  So I think as you get larger you need to think very hard if "10%" is something you can risk on an idea... if you are 25 and 10% is $5k that's much different than if you are 35 and 10% is $100k, or 45 and 10% is 500k.

 

Some of the answers above seem to imply that it's no different... I would would argue that is a dangerous way to think.  Clearly you can recover a $5k loss at 25 more than you can recover a $500k loss at 45 (I'm just making up numbers, obviously just examples)... so I would think a rational person would certainly consider their future lifetime earnings (remaining) compared to current bankroll when deciding how much to invest.

 

I don't have an answer for your original query, but I guess I'm saying that your views should change (slightly) as you get more current paper wealth and age... it's different.

 

Now, to be fair, I don't think it's that different, and if you really are a true "no loss" investor, then it may not change much, but I do think thinking it through is important.

[Jurgis]

Couple things that other people did not mention:

 

- You might consider keeping a cash and/or fixed income percentage if you are concerned about big decline in your stock holdings. Yes, this might mean underperformance, but it's still a valid way to deal with stress/anxiety/etc.

- You have to find your own comfort level with position sizes, diversification, etc. For some people, 3 25% size positions are fine. For others, 100 0.5% positions are fine. There is no single answer.

 

Somewhat an aside, but perhaps connected to what benhacker said: Stan Druckenmiller (and maybe Howard Marks?) have mentioned the well known saying that you send 18 year olds into the war because old guys don't charge into enemy lines. This somewhat applies to investing too. In certain situations it might be best to get new blood to charge into stock positions while old and jaded people find all kind of reasons not to invest. So old and jaded underperform... but young'uns blow up sometimes... These are two extremes, but it's something worth thinking about for everyone. Even if you're 45 years old, you might still want some big belief positions while you still have salary and can recover from losses. The guys who did the research suggesting that young people should have leveraged portfolios (was posted on CoBF recently) have a point somewhat.

[merkhet]

Couple things that other people did not mention:

 

- You might consider keeping a cash and/or fixed income percentage if you are concerned about big decline in your stock holdings. Yes, this might mean underperformance, but it's still a valid way to deal with stress/anxiety/etc.

- You have to find your own comfort level with position sizes, diversification, etc. For some people, 3 25% size positions are fine. For others, 100 0.5% positions are fine. There is no single answer.

 

Somewhat an aside, but perhaps connected to what benhacker said: Stan Druckenmiller (and maybe Howard Marks?) have mentioned the well known saying that you send 18 year olds into the war because old guys don't charge into enemy lines. This somewhat applies to investing too. In certain situations it might be best to get new blood to charge into stock positions while old and jaded people find all kind of reasons not to invest. So old and jaded underperform... but young'uns blow up sometimes... These are two extremes, but it's something worth thinking about for everyone. Even if you're 45 years old, you might still want some big belief positions while you still have salary and can recover from losses. The guys who did the research suggesting that young people should have leveraged portfolios (was posted on CoBF recently) have a point somewhat.

 

I think that research was done by Ian Ayers and Barry Nalebuff. They wrote a book called Lifecycle Investing.

[CONeal]

This will sound kinda weird but this is how I was able to make the conversion with managing a larger net worth.

 

Once it first occured and the stock was sold I just let it sit in the account for a couple of months to get accustomed to the larger number.  Then started investing on a % allocated.  Once that $ number went up, the emotional attachement a person has to money was pretty much gone during that process (read a few books about thinking differently while this was occuring).  The money I have now it just basically a number and I really don't have an emotional attachment to it.  There was a specific day where the conversion from being emotionally attached to just a number that I am trying to increase.  It has made life so much easier for me to view money this was. 

 

Hope this makes sense.

[rpadebet]

In my opinion, if you have 3-4 years of living expenses in cash + retirement savings (say in indexed funds)+salary you can reasonably count on, one should invest the rest (no matter the dollar amount) as if you had $100 to invest. If your downside is protected, the rest is just a number to keep score.

 

Anchoring yourself to a recovery value or thinking in terms of current salary, just introduce irrational biases and decisions. That being said, though I am pretty sure the most rational way to invest is to bet big on the most under valued stuff and pay no attention to short term volatility, I seem to be comfortable betting big only on the safest names.

[CorpRaider]

I just tried from the very beginning to consider everything in percentages, and not the actual dollar amounts, and mange the money the same way indefinitely.  As a result, I haven't noticed much of a difference from starting at the thousands of dollars to moving to the hundreds of thousands of dollars.

 

I'm not sure how helpful that is, as it was just a mindset I tried to get in before the sums got big.  It may evolve when it gets even bigger, but I'm not expecting it to at this point.

 

Exactly this.

 

It's natural to be a little worried when the sums become bigger, but keep in mind that it's always been and always will be a percentage of your savings anyway -- regardless of whether it's $1,000 (out of $10,000) or $100,000 (out of $1,000,000).

 

My usual response to posts by these two guys:  Ditto. 

[jawn619]

I suspect the OP knows that thinking in percentages is the right way to think about investing and is asking about how to viscerally get more comfortable with handling larger sums. To that I would give the advice of trying to be around the larger numbers more often. Start a mock portfolio with more nominal dollars than you are handling and start playing around with that. What you invest in doesn't matter, just being around the larger numbers makes it easier to deal with. I had to deal with larger sums of money at work and that helped me when it came time to invest my own money.

[TwoCitiesCapital]

I agree with all of the talk of considering things in percentages. I also placed a position cap (in percentage terms) on my positions now that the amount that I lose is in a given position or two is getting to the point where my annual contributions will no longer be enough to make up for mistakes and help me effectively double down. As of right now, the cost basis of the position can be no more than 10% of my net-worth at the time of purchases.

 

This caps the relative $ amount I'm willing to lose in a position (because I know I'm going to make mistakes) and it also encourages me to build positions over time simply because I rarely have 10% of my net worth sitting in unused cash and I know that if I blow the whole 10% buying too early that I can't double down.

[krazeenyc]

First of all, it's a great problem to have, but I would say it definitely depends on your circumstances (for example do you have a day job and how much do you earn in that job relative to your net worth). IMO, thinking about investments in terms of percentages is only part of the equation.  I never minded being pretty concentrated (~10 positions -- I consider that to be very concentrated)  when I was younger, had less money, less responsibilities, etc. Earning back a 10% portfolio loss through work or other opportunities could be done in 1 or 2 years.

 

Now, I have kids and a wife AND our income comes solely from our investments.  Our net worth is such that if we both worked, it would take the rest of our lives to gross what our net worth is today.  Obviously I try hard to generate market beating returns, but preserving capital is #1.  I still occasionally put on a 10% position (whereas when I was younger that might have been 15 or 20%), but it's quite rare and only when I think it is a "no-brainer".

[AzCactus]

I agree with most of the chatter that (%'s) are relevant but so is your ability to earn back that income.  Clearly if the position is 20% of your net worth and a single paycheck is 10% than its really less of an issue.  However, even if you have a 8%-10% position, but it would take years to earn back if that substantially moved against you it is (in some ways) are more risky.  The overarching key is the ability to sleep at night and be comfortable irrespective of any specific position sizing. 

[Guest Schwab711]

The idea of getting comfortable with larger sums brings up a good point that it is extremely difficult to handle nearly any AUM. It is extremely difficult to "skip steps" since the comfort with larger net wealth generally comes from experience and time spent at certain net wealth levels. You could see why even responsible lottery winners generally don't fair well.

[racemize]

This will sound kinda weird but this is how I was able to make the conversion with managing a larger net worth.

 

Once it first occured and the stock was sold I just let it sit in the account for a couple of months to get accustomed to the larger number.  Then started investing on a % allocated.  Once that $ number went up, the emotional attachement a person has to money was pretty much gone during that process (read a few books about thinking differently while this was occuring).  The money I have now it just basically a number and I really don't have an emotional attachment to it.  There was a specific day where the conversion from being emotionally attached to just a number that I am trying to increase.  It has made life so much easier for me to view money this was. 

 

Hope this makes sense.

 

I also have that feeling.  I look at the numbers constantly, but they don't feel all that real any more.  I'm not planning on using that money anyway, just making it grow until I die and give it all away.....

[Uccmal]

Wow, Lots of great thoughts on this topic. 

 

You'll know you've made it (whatever that means) when your holdings drop by your annual pay over a week, or in my case by 5 x my annual pay in March of 2009.  Its like getting drunk.  Great on the way up, terrible on the way down.  But, It moves from stomach churning to mildly annoying.

 

It all boils down to experience:

 

- For three years running my annual income taxes started to eat up most of my annual pay (partly a function of trading often)

- My portfolio has fluctuated many times (at least a dozen) by my former wage in a week. 

 

The comment about lottery winners is interesting.  They dont learn to handle money along the way, whereas we do. 

[ZenaidaMacroura]

It's a strange feeling when your the daily fluctuation in your portfolio is a greater absolute number than your semi-monthly paycheck.

 

I also echo the thing about feeling awkward when you pay out a larger percentage of your annual salary in capital gains taxes on a good year.

[innerscorecard]

The idea of getting comfortable with larger sums brings up a good point that it is extremely difficult to handle nearly any AUM. It is extremely difficult to "skip steps" since the comfort with larger net wealth generally comes from experience and time spent at certain net wealth levels. You could see why even responsible lottery winners generally don't fair well.

 

Fantastic and very subtle point. I wonder if this means that people investing OPM (since they will pretty much by definition feel differently) will on average be better (less emotional baggage) or worse (no care for the hard-earned money) than those investing their own money?

[Jurgis]

will on average be

 

It's a good question, but you ruined it by saying "on average".  8)

It's exactly the sort of question where the experiences are likely to be on both sides of the coin and average is likely to be meaningless.

 

JMO.

[oddballstocks]

This will sound kinda weird but this is how I was able to make the conversion with managing a larger net worth.

 

Once it first occured and the stock was sold I just let it sit in the account for a couple of months to get accustomed to the larger number.  Then started investing on a % allocated.  Once that $ number went up, the emotional attachement a person has to money was pretty much gone during that process (read a few books about thinking differently while this was occuring).  The money I have now it just basically a number and I really don't have an emotional attachment to it.  There was a specific day where the conversion from being emotionally attached to just a number that I am trying to increase.  It has made life so much easier for me to view money this was. 

 

Hope this makes sense.

 

I also have that feeling.  I look at the numbers constantly, but they don't feel all that real any more.  I'm not planning on using that money anyway, just making it grow until I die and give it all away.....

 

I wonder about this, here comes a heretical thought.  You save up and spend all this time investing, you never spend any of it and then you give it all away.  What was the point exactly? 

 

Is it so you get your name on a building when you give it away?  How many people remember the names on buildings at places?  If you're truly doing this for an impact (my presumption) you could probably make a bigger impact by donating your time and life to some mission.  People remember Mother Theresa even though she doesn't have a name on a building.

 

If you're saving for the future, or you spend part of your savings I get this.  But if you live on less in some monkish lifestyle and never touch a dime to unload all of it I'm missing something.  Why not just disavow money in the first place, live the monk lifestyle and then make an impact through your time?