The World Cup is over.
Spain are the champions.
Coming into last week’s final, Argentina had Lionel Messi – the best player ever to grace the sport.
Spain had the better team.
And last night, the better team won.
Every footballer dreams of winning the World Cup, a stage that comes around only once every four years.
When the event arrives, you can be sure the world’s best put their best foot forward – literally.
But here’s an interesting stat.
According to Opta, this was the worst World Cup for penalty takers on record.
Think about that.
These are the most technically gifted players alive, taking a kick they have rehearsed thousands of times.
Even Messi missed from the spot this tournament – not once, but twice.
Evidently, it isn’t just skill – it’s pressure.
A penalty at a World Cup is nothing like a penalty in training.
The gap between practising something and executing it – when everything is on the line – can undo even the greatest.
As investors, we face our own version of that gap.
When the pressure runs high in the stock market, the last thing you want is to be making big decisions on the fly.
The answer is to decide your rules in advance – simple ones, easy to remember – so you don’t overextend yourself when your nerves are frayed.
Here are three you should keep close.
Rule 1: Don’t use leverage
The late Charlie Munger once said there are only three ways to go broke: liquor, ladies, and leverage.
Warren Buffett later added the punchline – the first two were there because they started with an L.
The one that truly does the damage is leverage.
Sadly, we are watching that play out right now.
After a leverage-fuelled rally, the KOSPI has tumbled around 30% from its June peak.
Consequently, investors who borrowed to pile into stocks such as Samsung Electronics (KRX: 005930) and SK Hynix (KRX: 000660) are being forced to sell into the fall.
According to Korea’s Financial Supervisory Service, more than 1.2 million leveraged accounts had triggered margin calls by mid-July.
The Maeil Business Newspaper reports forced liquidations have already reached about 2.3 trillion won, or nearly US$1.6 billion.
Here’s the cruel arithmetic of leverage: when you’re forced to sell below what you paid, you can end up with the debt and none of the shares.
That’s a hole you never want to dig for yourself.
Rule 2: Don’t invest money you’ll need within five years
We are all at different stages of life.
You might be saving for a home, a wedding, a child’s university fees, or, yes, a honeymoon.
Whatever it is, money earmarked for the next few years has no business in the stock market.
The reason is simple.
Over two or three years, the market can go anywhere.
Put money you need at risk, and if the timing turns against you, you may be forced to sell at the worst possible moment.
Keep near-term money out of harm’s way.
It’s one of the easiest rules to follow and one of the most valuable.
Rule 3: Invest at half the pace you saved
Here’s a rule of thumb I like: invest your money at half the rate it took you to save it.
For instance, if it took five years to put aside $100,000, there’s nothing wrong with taking two and a half years to deploy it.
Never feel rushed to invest everything at once for fear of missing out.
Just because the market sits at an all-time high doesn’t mean it will keep climbing.
A pullback will eventually come.
And if you’ve already committed every dollar, you’ll be left watching the bargains go by with nothing left to buy them.
Get Smart: Simple rules beat nerves
Neither you nor I will ever take a penalty like Messi, and we’ll never feel the weight of a World Cup final on our shoulders.
But the lesson still lands.
At the highest-pressure moments, raw skill and deep knowledge aren’t enough on their own.
What carries you through is having decided, calmly and in advance, exactly what you will and won’t do.
The best players in the world can miss from the spot.
The best investors can lose their heads in a falling market.
Simple rules are how you keep from beating yourself – because the trophy isn’t won by the most talented.
It’s won by those who hold their nerve when it matters most.
The STI keeps hitting record highs. Some investors are piling in, worried about missing out. Others are sitting on the sidelines, worried they’ve missed the boat. Both instincts can cost you. So join our upcoming webinar to avoid those mistakes. We’ll show you how to build a S$100,000 dividend portfolio that works whether the market is climbing or cooling off. Seats are limited. Save your spot now.
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Disclosure: Chin Hui Leong does not own any of the shares mentioned.
