What are your limitations?
It’s tempting to disparage limits, to say that they stop people from doing what they want to do when they want to do it. But setting limits is just a way of acknowledging our humanity—that we live in a real world, not a projection of our own imaginations.
On Mount Washington acknowledging your limitations can save your life—establishing factors like turn-back times, where you decide not to press on to the summit, no matter how close you are; or recognizing that some runs are too just too hairy for your skiing skills right now.
Limits can be physical or they can be psychological, but in either case they’re real, and they keep us from making foolish decisions in the emotion of the moment. It’s the same with investing. If you’ve determined to have a 50/50 split between stocks and bonds with a 10% window, then it’s time to rebalance when it gets to 60/40. Similarly, if you don’t want to have more than 5% of your portfolio in any one stock, then when something becomes dominant—as GE did in the ‘90s, or United Health did 5 years ago, or Apple recently—then it’s time to trim that position. Such limits have saved investors a lot of money and a lot of tears.
Setting limits is a way to determine guidelines rationally when the fog of the mountains—or markets—would entice us to act irrationally. They keep us grounded in what’s real, and they keep us out of trouble.
Douglas R. Tengdin, CFA
Chief Investment Officer