One of my favorite sayings in investing is, “no pain, no premium.” Corey Hoffstein popularized this phrase in his commentary, “No Pain, No Premium,” where he discusses the limits of diversification and how ultimately, without risk, there should be no expectation of return.
The ability to withstand investment “pain” does depend on your personal tolerance to accept risk. However, with the help of strategic financial planning, you can put yourself in a position to withstand the volatility needed to grow your money.
Understanding your capacity to take on risk from a financial perspective, combined with your tolerance to accept risk from a psychological perspective, creates Diamond Hands.
If you’ve got “diamond hands,” you’re ready to hold a position for the end goal, despite the potential risk, headwinds and losses. If you’ve got paper hands, you exit a position, or fold, early on because the heat of the situation might be too much.
“Diamond Hands” is just modern-day slang for accepting the risk of staying invested.
When used responsibly by a long-term investor, Diamond Hands create a practical advantage for staying disciplined during any market environment.
Hear me out — Diamond Hands — but for a bundle of diversified index based ETFs once you’ve built a rock-solid financial plan that is tailored to your needs and wants.
— T.J. van Gerven (@TJvanGerven) February 2, 2021
Here are some financial planning starting points for building Diamond Hands:
Track Your Expenses And Determine Your Cash Reserve
Understanding your spending needs is crucial for determining how much cash reserve you need. Why do you need a cash reserve? Because it allows you to maintain your Diamond Hands during periods of market volatility. If you incur a major unexpected expense, you don’t need to sell from your portfolio at potentially inopportune times. Understanding your monthly income and spending is the foundation of any financial plan.
Understand What You Own And Why You Own It
Understanding what you own and why you own it distinguishes the difference between a speculator and an investor. If you’re buying a stock because someone says it’s “going to the moon,” you’re speculating with no basis other than the Greater Fool Theory. When you understand what you own and why you own it, you can invest with confidence. For example, if you own the global stock market, you’re investing in the growing innovation of financial markets to provide better service and products to consumers. We have hundreds of years of track history showing us markets grow in the long run. While it’s not guaranteed, if you’re optimistic about the future of human civilization, you should want to invest in the growth of global financial markets to preserve and grow your hard-earned wealth.
Buying a meme stock because someone says it’s going to the moon is, in fact, gambling.
Which is cool if you understand that and are treating it as you would a gambling expense.
Just don’t trick yourself into thinking it’s something it’s not.
— T.J. van Gerven (@TJvanGerven) January 29, 2021
Understand Your Capacity For Risk – When You’ve Won, Stop Playing The Game
This goes hand in hand with understanding what you own and why you own it. Creating a rock-solid financial plan is about understanding a realistic range of outcomes and providing yourself a margin of safety within your personal finances when things inevitably go differently. Your capacity for risk is how much you can afford to lose based on your needs and wants. If you’ve achieved Financial Independence or are on track to do so, why take on more risk than is needed to maintain or accomplish your goals? When you’ve won, stop playing the game.
the great rotation from meme stocks to boring long term value has begun https://t.co/EObBiw30Z6
— Wu-Tang Financial 🥑 (@Wu_Tang_Finance) February 1, 2021
If you really want Diamond Hands – create a financial plan that allows you to stay invested during any market environment. Chasing meme stocks isn’t a sustainable investment strategy.