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me and my money

Michael Batnick, 33, is the author of Big Mistakes: The Best Investors and Their Worst Investments, which looks at some of the bad moves made by top investors such as Warren Buffett, Jesse Livermore and Paul Tudor Jones, illustrating the behavioural pitfalls that hold investors back. Mr. Batnick also hosts a weekly podcast (http://theirrelevantinvestor.com) and is the director of research at Ritholtz Wealth Management in New York. We talked to him about how he invests.

Even the greats have had some investments go awry, as your book illustrates. How about your experience – any missteps?

Like many people, I was overconfident when I started investing. I got off to a decent start buying stocks when they broke out and later selling them for a gain or if they retested the breakout.

It took me less than two years to figure out that I was not destined to outperform the market over time. I remember walking into a TD Ameritrade branch and the person helping me told me I had spent $12,000 in trading commissions over the previous 12 months.

That was shocking. I was spending all day in front of the computer screen, just spinning in circles. I started to think maybe Jack Bogle was onto something. [Mr. Bogle is a well-known advocate of index funds and passive investing.]

How does your portfolio look now?

As for my taxable money, 60 per cent is invested in a global mix of equity index funds and rules-based active funds that focus on value and momentum stocks. I don’t trust myself to pick a successful discretionary stock picker, but I do believe that quantitative strategies can add value over the long term.

Another 20 per cent of my taxable money is in New York municipal bonds, which have a pretty good tax-equivalent yield. I plan to sell some of the bonds next year to pay for a move to the suburbs.

The remaining 20 per cent is in a simple trend-following model – in which a rise in the price of a stock above a certain level is a buy signal and a decline below another level is a sell signal. This is a way to help me cope whenever a 40-per-cent to 50-per-cent drawdown occurs during the next bear market; by taking a chunk of my money off the table before there is too much damage, it will hopefully help me stay invested with the rest of my portfolio.

I also hold cash equal to six months of living expenses. I don’t care if this might be a drag on long-term returns. I see it as an emergency fund and I like that it gives me the option to buy stocks at lower prices.

In my 401(k) [an employer-sponsored investment savings account in the United States], I invest in the same funds we use for our clients. The difference is that I am not in a balanced portfolio but rather 100 per cent in stocks. One thing I like about the account is that it helps me continue investing during bear markets since contributions are automatically deducted from my paycheque every two weeks.

Can you tell us about a recent trade?

I bought gold in my Roth IRA [a U.S. investment account similar to a tax-free savings account in Canada] at the end of August, 2017, because the price had closed above its 12-month moving average. As I wrote in a blog post at the time, history shows that the gains from buying on this signal would be massive a third of the time while the losses would be shallow the rest of the time. Alas, the latter was the case, and I unwound the trade when it closed below the 12-month moving average – for a 2-per-cent loss.

Any advice to other investors?

Write things down. I kept a trading journal, which held me accountable. I would go back and read why I bought or sold something, and a few months later, inevitably, it would sound ridiculous. It’s easy to misremember something or blame other people or outside forces for your shortcomings, but writing it down protects you from fooling yourself. I cannot emphasize how important this was.

Larry MacDonald is an economist, author and financial writer.

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