This essay was originally published in DailyWealth Trader, a daily trading advisory, and has been adapted. To learn more about this service, click here.
One of the simplest truths of life sat with an ugly orange fuel tank.
Daniel Crosby was at the U.S. Space & Rocket Center in Huntsville, Alabama when a space shuttle caught his eye.
Crosby is a New York Times bestselling author. And he wrote about this discovery in his latest book, The Behavioral Investor.
The book highlights bad investor behaviors in the market. It helps folks recognize and correct those behaviors.
And this particular visit led to one of his great pieces of advice in the book. It's something every investor needs to hear...
You see, Crosby noticed that the space shuttle had a gleaming white exterior. Yet, the fuel tank was a rusty orange.
His first thought was that it looked terrible. Why didn't they just paint the whole space shuttle white?
He found out why after doing a little digging...
It turns out the fuel tank was painted in the early versions of the space shuttle. But these first explorations revealed that the rocket was too heavy.
That's when the engineers looked for solutions. At first, it meant trying different "Space Age" materials to try and find something lighter.
They tried a few iterations of using more complicated solutions. But they had no success.
It turns out, they were making things too hard.
The problem wasn't solved until a low-paid line worker found out about the efforts and proposed a simple solution: Just don't paint the fuel tank.
The engineers were looking to cut the shuttle's weight by 600 pounds. And it just so happened that the amount of paint used to cover the tank weighed about 600 pounds.
So once they realized that leaving the tank unpainted wouldn't hurt the aerodynamics, they left it alone.
Daniel's point here is that it's in our nature to look for complex solutions. That's true no matter what field of work we're in. And that can lead to missing the most obvious solutions – ones right in front of you...
This is a great reminder in today's market to not overcomplicate things. You see, people often make clouded judgments in down markets or periods of uncertainty. They can overlook simple solutions.
What you want to do is stick to the tools you have in place. In other words... don't paint the tank.
The first obvious tool is to use a stop loss. This is a limit price at which you will sell your stock no matter what you believe.
For example, a 25% trailing stop means if a stock falls 25% from its recent high, you sell. And you live to fight another day.
This isn't an exciting solution. It's a darn simple one. But it's very effective when it comes to avoiding major losses.
Another tool is asset allocation. If you're losing sleep over today's volatility, odds are you own too much of one part of the market... or one asset in general.
Asset allocation means spreading your investments across stocks, precious metals like gold, and commodities. These are a few examples of different assets you can own.
The point is spreading out your investments lowers your chance of everything falling at once.
For example, commodities soared 29% in 2022, while the S&P 500 Index was down 19%. And gold was flat on the year.
Those who only invested in stocks took a hard hit. But those who spread out their wealth did much better.
In short, keep it simple when things aren't going your way. Rely on the tools you have at hand before scheming up a complex plan that's less likely to work.
This is a great way to fight our natural behavior to do more than is necessary. And it just might save you a bunch of time, money, and stress in the long run.
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