How to cultivate the right mindset for investing success

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You’re a business owner—so act like one

The most powerful wealth machine ever built, the stock market “democratizes” capitalism by making business ownership available to anyone with even modest means. You can purchase shares in great companies at exactly the same market price as the largest institutional investors

pay. As a shareholder of public companies, do not think of yourself as a “stock market investor.” Think of yourself as a business owner. And business owners don’t waste energy fretting about daily changes in the ‘market value’ of their businesses. They focus on building the value of their businesses through long term earnings growth. Of course, you have boards of directors and managers running your businesses. And regardless of how you spend your day, thousands or millions of your employees will spend their day on their primary mission: creating wealth for you. And you don’t have to lift a finger. Fantastic!

Whether you own stocks directly or through funds, taking this same business owner point of view will help put the largely meaningless short term stock market ups and downs in perspective. 

Find your balance

Determining the portion of your portfolio to invest in stocks versus more safely in bonds or GICs will be your most important investment decision. Invest in stocks only to the extent you are committed—as a business owner—to ride out market storms. As a worst-case scenario, let’s assume that there will be up to a 50% decline in stock values during a future economic crisis, similar to the darkest hours of the 2008–’09 global financial crisis.

Ask yourself this question: What level of short-term losses in my total overall portfolio am I prepared to tolerate during a stock market crash? Your answer may change over time but your “tolerable loss ratio” can provide a useful rule of thumb when it comes to determining the right mix of stocks and bonds in your portfolio at any given point in time.

If your “tolerable loss” is zero—in other words, if you aren’t prepared to suffer any losses whatsoever, even short-term losses—you are in full wealth-protection mode. You should own zero stocks.

What if you are willing to accept the risk of short-term losses up to around 25 percent of your total portfolio in order to have a high probability of long-term gain? In our worst-case scenario of a 50% market crash, the total value of a $100,000 portfolio split 50/50 between stocks and GICs would decline by 25% to $75,000. (The stock portion would decline in value from $50,000 to $25,000 while the GIC value remains constant at $50,000.) Therefore, if your  tolerable loss is 25%, you should place no more than 50% of your investable assets in stocks, with at least 50% placed in GICs or bonds. 

If, however, you are committed to weather the storm of a potential short-term 50% market meltdown in order to capture 100% of the ultimate long-term growth of the stock market, you may choose to be 100% invested in stocks.



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