volatility in MOETF can add to stressor profile.

Once a few months I hit an all-at-once situation

——

My friend Sachin.K asked how I build a firewall around my stock portfolio.

A firewall is built to contain the volatility to within a portfolio (which tends to spill over), to support buy-n-forget, to prevent excessive babysitting, and protect our sleep, our concentration at work, our family time… A firewall is crucial if we want to keep recreational investing as recreational.

• focus on DYOC. If I can hit 8% DYOC, then over 5Y cumulative div would recover 40% of my capital
• check dividend trec
• ask myself periodically “Can you sleep well if total committed amount depreciates by half?” If not then sell some stocks. Overcommitment is a necessary (but insufficient) condition of excessive babysitting.
• stand aside if price rises after I buy. This reduces the risk of firewall breach.
• — some generic tips on diversification in depth. Real diversification strengthens the firewwall from the “inside”
• diversify using large variety of single stocks, not ETF. In a down turn, I will hope to have a non-trivial number of positions above water
• avoid high concentration in one name. Buy incrementally if price falls after I buy
• avoid high concentration in any sector
• diversify internationally, to reduce correlation with SP500
• — generic tips on portfolio protection
• prefer defensive stocks, hopefully recession-proof
• build up a buffer in price appreciation. Buffers can absorb impact of market crash

— My stance on hot growth stocks
I keep very small exposure to hot stocks, perhaps 1-5% of my NAV. Hot stocks tend to be overpriced and more volatile. They are almost always low-yield, hard to buy-n-forget.

In good times, these stocks tend to outperform the indices, and leave my portfolio /in the dust/. Talking to investors in those stocks can be uncomfortable, so I remind myself

• Those fellow investors often invest only small amounts (like $1k) in a given “high-flyer” stock. I too own some high-flying stocks in small quantities.
• Those fellow investors often bought fairly late, so their actual return is probably not as high as in the media.
• The extra return comes at a high emotional cost (like sleep, family time…). This is similar to the WonderWomen1984 dreamstone — You get a wish granted, but pay a heavy price.

In bad times (can be any time, even amid the good times), these hot stocks tend to fall faster. Hot stocks, by definition, attract hot money. Hot money comes fast and goes fast, often driven by news. They are the trouble-makers that threaten to break my firewall. Owning a hot stock looks almost like riding a tiger. I worry more about my peace.