Is there a place for a trading bot in a long-term portfolio?
One of the hardest things for Investors to master is to control the urge to trade or “adjust” a long-term portfolio and thereby potentially risk being shaken out of what initially started as long-term positions. Having been a stockbroker for over a decade in my previous life and in the markets for over 25 years, it’s still something I personally grapple with, and I know I’m not alone.
It’s not uncommon for investors in the best performing managed funds and ETFs to still lose money. It’s easy to see in the figures. Record fund inflows usually occur at or near market peaks and the largest outflows are commonplace near market bottoms.
It’s also no accident why the best performing accounts are usually either those that belong to people who have passed away a long time ago or accounts that people have forgotten about or lost access to.
With fear and greed driving short-term market movements, human nature can be an investor’s worst enemy, therefore, if you can remove the human element half the battle’s won.
There are many ways to remove or at least somehow mitigate the human factor in the markets and it’s also a case of horses for courses as one strategy won’t be appropriate for everyone but outlined below, is what has worked for me so far.
I run two separate accounts. I have my long-term “HODL” portfolio, but I also manage a separate trading account. The trading account is a lot smaller, but I allow myself a manageable amount of leverage to keep it meaningful. Whenever I think I see something the market is slow to price in, or I have any other urge to adjust the long-term account I ensure I restrict any activity to the trading account. This way, the trading account gives me a place to channel the urge to adjust a position but importantly it keeps me from making short or medium-term adjustments to long-term holdings.
The long-term account is doing very well but that’s not important as I have an ideally ‘forever’ or at least a decades long time horizon. In terms of my trading account, I’ve been very fortunate and have managed to 5x my initial investment over the last 12 months, but I’m not naive enough not to realise that accommodating markets and leverage had a lot to do with it as has good luck. It’s great that the trading account made money but if it didn’t it would have still served its purpose of keeping my trigger-happy fingers away from my long-term positions.
As I mentioned, if you can remove the human element, half the battle’s won. That’s one of the reasons why I like to make use of a trading bot. I’ve only put in a small amount which I can afford to lose, and I run it in conjunction with my trading account. I found it has really helped me with my trading psychology. Knowing that it’s always doing its thing in the background means I have less of an urge to take trades and I am less likely to be affected by FOMO.
It’s rare that I check to see how it’s going, I think I’ve only checked it three times in the last 6 months, otherwise it kind of defeats the point of running a bot. Another thing I found with it is that when I do check on its performance I am obviously pleased if it has made money but something I didn’t expect is that when I checked on it the first time and it was losing money it didn’t bother me. I think it is because I realised that if I didn’t have the bot, I may have been compelled to trade myself and my results may well have been the same, but the difference is that I would have wasted a lot of time for no reward. There is nothing more frustrating about trading than devoting hours to the screen and having nothing but a loss to show for it, other than perhaps an expensive lesson. I guess the reason why I was completely fine with the losses is because I was thankful for having saved hours staring at the trading screen.
Although I may have been a stockbroker in my previous life, I haven’t practiced as such or held an authorised representative license from an AFS licensee for almost 15 years and obviously none of the above is financial advice of any kind. I’m just sharing my views and my experience.
