Latest / How Canadian Markets Work / Episode 96: The Portfolio Management Process (The Behavioral Shield)

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Episode 96: The Portfolio Management Process (The Behavioral Shield) · How Canadian Markets Work

• 0:00
  So picture this, the markets have fallen like
• 0:04
  30 % over the last six weeks. Oh, man. Yeah.
• 0:07
  Yeah, the absolute worst feeling. Right. It's
• 0:10
  terrifying. The news on your phone is just uniformly
• 0:13
  bad. I mean, every headline is screaming about
• 0:16
  some impending economic collapse. And every so
• 0:19
  -called reasonable person on TV is explaining
• 0:22
  in excruciating detail why it's going to get
• 0:24
  even worse. Exactly. So you're sleep deprived.
• 0:28
  You were frightened. And you're just sitting
• 0:30
  there watching the numbers in your portfolio
• 0:33
  absolutely plummet. Just free falling. Yeah.
• 0:36
  And right at that moment, you are forced to make
• 0:38
  the most consequential decision. of your investing
• 0:40
  life, literally at the exact moment you are least
• 0:43
  equipped to make it. You're just in pure fight
• 0:45
  or flight mode. You really are. You're trying
• 0:46
  to decide, do I sell everything right now to
• 0:49
  stop the bleeding, or do I hold on and just risk
• 0:51
  losing everything else? It is a genuinely terrifying
• 0:53
  position to be in. I mean, the physiological
• 0:56
  stress is real, and it completely overrides the
• 0:58
  rational, analytical part of our brain. Which
• 1:01
  is exactly why we're talking about this today.
• 1:03
  Because, you know, in our previous Deep Dive,
• 1:05
  we talked about asset allocation. Right. Episode
• 1:07
  95. Yep. Specifically, that crucial split between
• 1:10
  equities and fixed income. And we were looking
• 1:13
  at the mechanics of building wealth. But having
• 1:15
  the perfect asset allocation on paper, it really
• 1:18
  means absolutely nothing if a market crash triggers
• 1:22
  your primal instincts and you just abandon the
• 1:24
  strategy halfway through. Yeah, because you can't
• 1:26
  outthink a panic while you're actually inside
• 1:28
  it. No, you can't. The solution has to be put
• 1:31
  in place long before the crisis even begins.
• 1:34
  Which brings us to the core mission of today's
• 1:36
  deep dive. We are basically building a behavioral
• 1:39
  survival guide. I like that framing. Yeah, so
• 1:42
  today we're pulling from academic papers on behavioral
• 1:45
  finance, historical market data from major crashes,
• 1:49
  and standard institutional wealth management
• 1:52
  manual. The heavy reading. Exactly, the heavy
• 1:54
  reading so you don't have to. And we are taking
• 1:56
  this concept called the portfolio management
• 1:58
  process, which, I mean, let's be honest, sounds
• 2:01
  like a deeply dry institutional framework. It
• 2:03
  sounds incredibly boring, honestly. It really
• 2:06
  does. But we're translating it into this profound
• 2:09
  psychological tool for everyday investors. Because
• 2:12
  we really need to look closely at how the professionals
• 2:16
  manage massive pools of money. They don't rely
• 2:20
  on gut feelings. They follow this continuous
• 2:23
  four stage loop. OK, so let's walk through those
• 2:26
  stages. Sure. So the first stage is establishing
• 2:29
  objectives and constraints. Setting the ground
• 2:31
  rules. Exactly. Then the second is determining
• 2:33
  the actual asset allocation. The third is implementing
• 2:37
  that allocation in the real world. Buying the
• 2:39
  stuff. Buying the stuff, yeah. The fourth stage
• 2:42
  is monitoring and rebalancing. which, you know,
• 2:45
  eventually feeds right back into stage one. Because
• 2:47
  it's a loop. Exactly. And out of that very first
• 2:50
  stage comes a specific output that we're going
• 2:52
  to focus on pretty heavily today, and that is
• 2:55
  the investment policy statement or the IPS. Right.
• 2:58
  So institutions like pension funds or massive
• 3:00
  university endowments, they are legally required
• 3:04
  to have an investment policy statement. It's
• 3:06
  basically their constitution. It is their governing
• 3:08
  constitution. If the market takes a massive dive,
• 3:12
  The managers can't just act on a whim, you know.
• 3:16
  They have to consult the policy. But individual
• 3:18
  investors almost never take the time to write
• 3:20
  one. Never. Yeah. Which just leaves this enormous
• 3:23
  vulnerability in their financial armor. OK, let's
• 3:25
  unpack this because I can hear the skepticism
• 3:27
  from the listeners already. This sounds like
• 3:30
  massive institutional bureaucracy. It does sound
• 3:32
  like homework. Right. Like, OK, a multibillion
• 3:34
  dollar pension fund has boards and committees.
• 3:37
  So sure, they need a constitution. But for a
• 3:40
  regular person who's just trying to save for
• 3:42
  retirement or a house. It feels like absolute
• 3:44
  overkill. Yeah. Now, writing a corporate policy
• 3:46
  document for your personal savings just feels
• 3:49
  ridiculous. I get that, but looking at it as
• 3:52
  a static, bureaucratic chore is a huge mistake.
• 3:55
  Yeah. If we connect this to the bigger picture,
• 3:58
  you have to think of the IPS as a living blueprint.
• 4:01
  The living blueprint. Yeah, it isn't a one -time
• 4:03
  checklist that you just fill out, put in a binder,
• 4:05
  and throw in a drawer to collect dust. It's a
• 4:07
  continuous loop because, well, your life is a
• 4:10
  continuous loop. Things change. Exactly. Human
• 4:13
  circumstances constantly change. You might get
• 4:15
  married, have a child, change careers, experience
• 4:18
  a sudden medical emergency, or maybe inherit
• 4:21
  some money. Every time your life shifts. The
• 4:25
  IPS is the tool that forces you to translate
• 4:28
  that messy life shift into a logical portfolio
• 4:31
  shift. OK. So you're basically forcing your future
• 4:33
  self to reconcile with reality. Yes. And building
• 4:37
  that blueprint starts with defining what you
• 4:39
  are actually trying to achieve. The sources point
• 4:41
  out that this foundational stage revolves around
• 4:44
  twin objectives, which are return and risk. Right.
• 4:47
  The two sides of the coin. So let's tackle the
• 4:49
  return objective first. Because if you stop someone
• 4:51
  on the street and ask them, hey, what's your
• 4:53
  return objective for your investments? I'll just
• 4:55
  say to grow my money. Exactly. Or to make as
• 4:58
  much as possible. But grow my money is an aspiration.
• 5:01
  It's not a target. Yeah. A return objective actually
• 5:04
  has to be highly specific. It needs an exact
• 5:07
  dollar amount by specific date for a defined
• 5:10
  purpose. So what does a good one sound like?
• 5:12
  A proper objective sounds like, I need this portfolio
• 5:16
  to generate $60 ,000 a year in inflation -justed
• 5:19
  income. starting in the year 2045 to fund my
• 5:23
  retirement. Wow, okay. That is specific. And
• 5:27
  the danger of leaving that vague is something
• 5:29
  I see trip people up constantly. Oh, all the
• 5:31
  time. Because if you only have a vague goal like
• 5:34
  make a lot of money, you have absolutely no guardrails
• 5:37
  for your behavior. None at all. Like, let's say
• 5:40
  we sit down and run the math on your savings
• 5:42
  rate and your timeline. And it turns out, based
• 5:45
  on the math, you only need a 4 % annualized return
• 5:48
  to reach that specific retirement goal. Which
• 5:50
  is very achievable and relatively safe. Right.
• 5:53
  But because you've never defined that and your
• 5:55
  internal objective is just maximum growth, you
• 5:58
  position your portfolio really aggressively aiming
• 6:00
  for like an 8 % or 9 % return. Which means you
• 6:03
  are taking on a massive amount of unnecessary
• 6:05
  risk that you aren't even being compensated for
• 6:07
  in your real life. on stress for no reason. Exactly.
• 6:12
  The math says you can afford to cruise across
• 6:14
  the finish line safely in a sturdy sedan, but
• 6:17
  you're choosing to drive a Formula One car on
• 6:19
  a wet track. That's a great analogy. And when
• 6:22
  the market inevitably drops, you are going to
• 6:24
  experience the severe volatility of an 8 % portfolio.
• 6:28
  And the stress of that volatility might cause
• 6:30
  you to panic and sell. Destroying your retirement.
• 6:32
  When a quiet boring four percent portfolio would
• 6:36
  have gotten you to your goal without the heart
• 6:37
  attacks Wow Which perfectly bridges us to the
• 6:41
  second objective, the risk objective. Because
• 6:44
  risk isn't just a single dial that you turn up
• 6:46
  or down. It's really not. The institutional framework
• 6:48
  breaks risk into two distinct dimensions that
• 6:51
  are constantly fighting with each other. Risk
• 6:53
  capacity and risk tolerance. And we really have
• 6:56
  to treat those as completely separate variables.
• 6:58
  Right. So risk capacity is the cold hard arithmetic
• 7:01
  reality of what your financial circumstances
• 7:03
  can physically absorb. The math. Just the math.
• 7:07
  Regardless of how brave you feel, if the market
• 7:09
  drops 30 % tomorrow, can your life survive that
• 7:12
  hit? Do you have high interest debt? Is your
• 7:14
  employment income unstable? Do you need to pull
• 7:17
  this cash out in two years to pay for a kid's
• 7:19
  tuition? Exactly. If any of those are true, your
• 7:22
  capacity for risk is mathematically low. OK,
• 7:24
  so that's capacity. But risk tolerance, on the
• 7:27
  other hand, is the psychological reality of what
• 7:31
  you can mentally handle. Yes. It's an emotional
• 7:33
  measure. It's basically how much volatility you
• 7:36
  can live through before the anxiety forces you
• 7:40
  to log into your brokerage account at 2 .0 a
• 7:43
  .m. and do something destructive. Right. And
• 7:45
  what becomes immediately apparent when you study
• 7:48
  investor behavior is that these two dimensions
• 7:51
  frequently contradict each other. Give me an
• 7:53
  example of that. OK. Imagine a 28 year old software
• 7:56
  engineer. They have a massive salary, no debt.
• 7:59
  and they don't plan to retire for 40 years. So
• 8:02
  their risk capacity is astronomically high. Astronomically
• 8:04
  high. They can absorb almost anything. But they
• 8:07
  check their portfolio every day, and they absolutely
• 8:10
  panic at the first sign of a 5 % market dip.
• 8:12
  Ah, so their risk tolerance is incredibly low.
• 8:15
  And then you have the exact opposite, right?
• 8:17
  Like a 75 -year -old retiree living on a fixed
• 8:20
  income who just loves the thrill of trading speculative
• 8:24
  tech stocks. Right. Their tolerance for risk
• 8:27
  is massive. They love the rush, but their capacity
• 8:31
  is almost zero. Because they need that money
• 8:33
  to pay for groceries next month. Exactly. So
• 8:36
  when the math and the psychology completely contradict
• 8:40
  each other, how does the framework decide which
• 8:43
  one wins? This is a strict rule. The lower of
• 8:46
  the two always governs. Always. Always. If you
• 8:50
  have high tolerance but low capacity, acting
• 8:53
  on your bravery will mathematically bankrupt
• 8:54
  you. Right. But if you have high capacity but
• 8:57
  low psychological tolerance, taking big risks
• 9:00
  will emotionally break you, which will cause
• 9:03
  you to sell at the worst possible moment, which
• 9:05
  will also bankrupt you. So the lower constraint
• 9:07
  is always your ceiling. The ceiling you cannot
• 9:09
  pass. That makes total sense. So we have our
• 9:11
  specific return goal, and we found our risk ceiling.
• 9:14
  Now we hit reality. We have to map out the roadblock
• 9:17
  standing between us and our goal. And in the
• 9:20
  institutional process, this means defining the
• 9:23
  constraints that give the portfolio its ultimate
• 9:25
  shape. Right. There are five major constraints
• 9:28
  every investor has to map out. OK, let's go through
• 9:31
  them. Time horizon is usually where we start.
• 9:33
  Simply put, when do you actually need to convert
• 9:36
  these assets back into cash to spend them? And
• 9:39
  the huge trap here is assuming you only have
• 9:42
  one time horizon. Oh, people do this all the
• 9:45
  time. A lot of people are simultaneously saving
• 9:47
  for a house down payment they need in three years
• 9:50
  and a retirement they need in 30 years. But they
• 9:53
  dump all their money into one single brokerage
• 9:57
  account and treat it as a single portfolio. Which
• 9:59
  is a disaster. Yeah. If you apply a 30 year investment
• 10:02
  strategy to money you need in 36 months, you
• 10:05
  are setting yourself up to fail. Because if the
• 10:08
  market goes through a severe correction in year
• 10:10
  two, your house deposit just simply vanishes.
• 10:13
  Gone. Different horizons require entirely different
• 10:16
  asset allocations completely separated from one
• 10:19
  another, even if all the money belongs to the
• 10:21
  exact same person, which ties directly into the
• 10:23
  next constraint, which is liquidity needs. This
• 10:27
  assesses what cash you might need on very short
• 10:30
  notice. Like an emergency fund. Exactly. And
• 10:33
  the portfolio management process dictates a non
• 10:36
  -negotiable rule here. The emergency fund belongs
• 10:39
  entirely outside the invested portfolio. We really
• 10:42
  have to underline the mechanics of why that matters
• 10:44
  because, you know, recessions are usually the
• 10:47
  catalyst for severe market crashes and recessions
• 10:51
  are also exactly when companies lay people off.
• 10:54
  So if your emergency fund is tied up in equities
• 10:57
  and you lose your job during a recession, you
• 10:59
  are forced to sell your investments at the absolute
• 11:02
  bottom of the market just to pay your rent. You
• 11:04
  are locking in catastrophic losses because you
• 11:07
  failed to separate your liquidity constraint
• 11:09
  from your growth engine. The emergency fund is
• 11:12
  an insurance policy. It is not an investment.
• 11:15
  And treating it like one destroys wealth. Man,
• 11:17
  that's a great way to put it. OK, moving past
• 11:19
  liquidity, what's the third constraint? The third
• 11:22
  constraint is tax. And this doesn't just mean
• 11:25
  filing your taxes correctly at the end of the
• 11:27
  year. This is about account location. OK, explain
• 11:30
  that. Deciding where an asset lives is just as
• 11:33
  critical as deciding what asset to buy. Let's
• 11:35
  walk through how that actually works in practice,
• 11:36
  because I think this is where invisible wealth
• 11:38
  destruction happens for a lot of people. Absolutely.
• 11:40
  Imagine you hold a bond that pays a 5 % yield.
• 11:45
  If you hold that bond in a regular taxable brokerage
• 11:48
  account, the government is going to take a significant
• 11:51
  cut of that 5 % every single year, depending
• 11:53
  on your income bracket. Right. Over 20 or 30
• 11:56
  years, the drag on your compounding growth is
• 11:58
  just devastating. But if you place that exact
• 12:02
  same bond inside a tax -deferred account, like
• 12:04
  an IRA or a 401k... It compounds completely uninterrupted.
• 12:08
  Exactly. The asset itself never changed, only
• 12:11
  the location changed. But it fundamentally alters
• 12:15
  your net return. You are just optimizing the
• 12:17
  environment the asset lives in. Right. OK, number
• 12:19
  four. The fourth constraint deals with legal
• 12:22
  and regulatory boundaries. For individual investors,
• 12:25
  this often overlaps with those same retirement
• 12:27
  accounts. Because of all the rules. Exactly.
• 12:30
  The government puts strict rules on tax -deferred
• 12:32
  accounts. If you try to pull money out of a 401k
• 12:36
  before a certain age, you don't just pay tax.
• 12:39
  You get hit with steep early withdrawal penalties.
• 12:41
  Your allocation has to reflect the fact that
• 12:43
  this money is legally locked away. Right. Or
• 12:46
  think about if you work in the financial industry
• 12:48
  or at a publicly traded company. You might have
• 12:51
  compliance lockouts. Oh, right. Blackout periods.
• 12:54
  Yes. You literally might not be legally allowed
• 12:57
  to trade certain stocks during specific blackout
• 13:00
  periods. If your strategy relies on rapid trading,
• 13:04
  but the law says your hands are tied for a month
• 13:06
  every quarter, well, your strategy is broken.
• 13:09
  It's totally incompatible. OK, so we have time
• 13:11
  horizon, liquidity, tax and legal, which brings
• 13:15
  us to the fifth constraint. Right. Simply called
• 13:18
  unique circumstances. The catchall. It is the
• 13:21
  catch -all category for the messy realities of
• 13:23
  human life that just don't fit neatly into a
• 13:25
  spreadsheet. Like what? Well, perhaps you have
• 13:27
  a massive concentration of your employer's stock
• 13:29
  because you receive stock options as part of
• 13:31
  your compensation. Maybe you are financially
• 13:33
  responsible for an aging parent with complex
• 13:36
  medical needs. Or maybe you're expecting a significant
• 13:39
  inheritance in the next five years. Right, things
• 13:42
  that just completely change the math. These unique
• 13:44
  human factors drastically warp how conservative
• 13:49
  or aggressive the rest of your portfolio should
• 13:51
  be. To really visualize why mapping these roadblocks
• 13:55
  is so critical, the sources offer a comparison
• 13:58
  that I think completely destroys the old lazy
• 14:01
  advice of, you know, just subtract your age from
• 14:04
  100 to figure out your stock allocation. Oh,
• 14:07
  I hate that rule. Yes. Let's look at this comparison.
• 14:09
  So we have two hypothetical investors. Let's
• 14:11
  call them client A and client B. Both of them
• 14:14
  are exactly 42 years old. Both of them have exactly
• 14:17
  $300 ,000 in savings. Okay, let's look at client
• 14:20
  A first. They work as an independent contractor,
• 14:23
  meaning their income swings wildly from month
• 14:25
  to month. Unpredictable. Very. They are married
• 14:28
  with two young children, they carry a heavy mortgage,
• 14:30
  and they are trying to save for both college
• 14:32
  and retirement. Okay, so running their constraints.
• 14:35
  Their liquidity needs are massive to buffer that
• 14:39
  unstable income. Their time horizon is totally
• 14:41
  fractured. They need long -term growth, but they
• 14:44
  have immediate short -term liabilities. And mathematically,
• 14:47
  their risk capacity is incredibly low, because
• 14:49
  if they lose that $300 ,000, they might literally
• 14:52
  lose the house. Exactly. Now, compare that to
• 14:55
  Client B. also 42 years old, also has $300 ,000.
• 14:59
  But Client B is a tenured university professor.
• 15:02
  They have a guaranteed stable income that is
• 15:06
  never gonna disappear. They have no dependence,
• 15:08
  no mortgage, and their retirement will be fully
• 15:11
  covered by a defined benefit pension. Meaning
• 15:14
  they get a guaranteed paycheck for life. regardless
• 15:17
  of what the stock market does. So Client B's
• 15:19
  constraints are the exact mirror opposite. Their
• 15:21
  liquidity needs are near zero because the 10
• 15:23
  -year and the pension act as this ultimate safety
• 15:26
  net. Their time horizon for this specific $300
• 15:29
  ,000 is effectively infinite. They might just
• 15:32
  pass it on to charity. And their capacity for
• 15:35
  risk is absolute. It really is. Now, if you apply
• 15:38
  standard industry heuristics like a robo -advisor,
• 15:41
  it might look at their age and put both Client
• 15:43
  A and Client B into the exact same moderate portfolio
• 15:46
  because they're both 42 exactly but when you
• 15:49
  actually examine the constraints client a needs
• 15:52
  a heavy cash buffer and highly conservative fixed
• 15:55
  income positioning just to survive while client
• 15:58
  B client B could realistically put a hundred
• 16:01
  percent of that money into global equities experience
• 16:04
  a massive market crash and literally not lose
• 16:07
  a single minute of sleep same age Same account
• 16:10
  size, but their lives dictate completely different
• 16:13
  allocations. It changes everything. But, you
• 16:15
  know, knowing all of this, your risks, your timeline,
• 16:18
  your taxes... None of it matters if you abandon
• 16:21
  the plan the moment the market drops. Right.
• 16:23
  Which brings us to the actual psychological purpose
• 16:25
  of this document. Here's where it gets really
• 16:27
  interesting. We've talked about all this analysis,
• 16:29
  but the true purpose of the investment policy
• 16:32
  statement isn't analytical. No, it's not. It
• 16:34
  is behavioral. That is the ultimate secret of
• 16:36
  the IPS. Yeah. Yes, it guides your asset allocation.
• 16:40
  but its highest purpose is to serve as a contract
• 16:43
  with your future self. The contract. It is a
• 16:46
  document designed specifically to be pulled out
• 16:48
  and read at your absolute worst moment. When
• 16:51
  you're panicked. When you're panicked. In this
• 16:54
  document, you write down exactly what you own,
• 16:57
  exactly why you bought it, what your target allocation
• 16:59
  is, and crucially, you include a section that
• 17:03
  explicitly answers one question. And that question
• 17:05
  is... What will I do if the markets fall 30 %?
• 17:09
  And for the vast majority of long -term investors,
• 17:12
  the answer written in that clause should be incredibly
• 17:15
  boring. It's what I like to call the do -nothing
• 17:19
  clause. It should essentially read, I will do
• 17:22
  nothing except systematically rebalance the portfolio
• 17:25
  according to the mathematical rules I have already
• 17:27
  written down. I think we really need to unpack
• 17:30
  why writing that down actually works. Because
• 17:32
  if I'm panicking, right, my heart is racing and
• 17:35
  I'm watching my life savings evaporate on a screen.
• 17:37
  Why does reading a piece of paper stop me from
• 17:40
  hitting the cell button? What's fascinating here
• 17:42
  is that it changes how your brain processes the
• 17:44
  crisis. Okay. Reading a decision you made when
• 17:47
  you were calm, rational, and objective is a completely
• 17:50
  different cognitive act than trying to formulate
• 17:53
  a new decision while your amygdala is screaming
• 17:55
  at you that you are in mortal danger. When you
• 17:58
  open the IPS during a crash, you aren't evaluating
• 18:02
  the global economy anymore. You were simply checking
• 18:04
  a commitment you made to yourself. You're entirely
• 18:07
  outsourcing your panicked judgment to your past
• 18:10
  rational self. Yes. It's like, it's the ultimate
• 18:13
  Ulysses contract. You know, in the myth, Ulysses
• 18:16
  knew he was going to sail past the sirens, and
• 18:18
  he knew their song would compel him to steer
• 18:21
  his ship into the rocks. He couldn't trust his
• 18:23
  future self? Right. So while he was still in
• 18:26
  clear waters, he had his crew tie him to the
• 18:28
  mast. When the panic hit, he had already removed
• 18:31
  his own ability to act destructively. And in
• 18:33
  modern investing, the sirens are literally everywhere.
• 18:36
  They really are. The sirens are the red banners
• 18:38
  flashing on CNBC. They are the push notifications
• 18:41
  on your phone telling you the Dow just dropped
• 18:44
  another thousand points. Or your friends texting
• 18:46
  you in a panic telling you they're moving entirely
• 18:48
  to cash. Exactly. The psychological pressure
• 18:50
  to do something, anything to relieve that anxiety,
• 18:55
  just becomes overwhelming. And the historical
• 18:57
  data bears this out in terrifying detail. If
• 19:00
  you look at the 2008 financial crisis or the
• 19:04
  flash crash in March of 2020 when the global
• 19:06
  economy shut down and the S &P 500 lost a third
• 19:09
  of its value in just a few weeks. When you look
• 19:12
  at who actually suffered permanent catastrophic
• 19:15
  wealth destruction during those events, it wasn't
• 19:19
  the people who held the quote unquote wrong assets.
• 19:23
  It was the people who capitulated part way down.
• 19:25
  They couldn't take the psychological pain anymore,
• 19:28
  so they sold just to make the fear stop. And
• 19:31
  by selling, they turned a temporary paper loss
• 19:34
  into a permanent reality. They locked in the
• 19:36
  damage. And more importantly, they completely
• 19:38
  missed the subsequent recoveries. I mean, the
• 19:40
  people who sold at the bottom in March 2009 missed
• 19:43
  out on the longest bull market in human history.
• 19:45
  They capitulated because they didn't have an
• 19:47
  anchor. They were trying to be sensible during
• 19:50
  a panic, which human biology just makes... virtually
• 19:54
  impossible. The IPS is the tie to the mast. It
• 19:57
  is the only defense that consistently works because
• 20:00
  it completely removes the burden of decision
• 20:02
  -making during the crisis. Okay, let's bring
• 20:04
  all of this together for you, the person listening
• 20:06
  right now, because the portfolio management process
• 20:09
  isn't just some corporate exercise for Wall Street
• 20:12
  institutions. No, not at all. It's a continuous
• 20:15
  four -stage loop for your own financial life.
• 20:18
  You're setting objectives and constraints, determining
• 20:21
  your allocation, implementing it, and monitoring
• 20:23
  it as your life changes. And we established that
• 20:26
  your return objective must be highly specific
• 20:29
  and purposeful. Right? Not just a vague desire
• 20:32
  for growth. Yep. And we separated risk. into
• 20:36
  your arithmetic capacity and your psychological
• 20:39
  tolerance, acknowledging that the lower of those
• 20:41
  two always dictates your boundaries. And then
• 20:44
  we mapped out the five constraints that dictate
• 20:46
  reality. So, navigating multiple time horizons,
• 20:49
  protecting your liquidity by keeping the emergency
• 20:51
  fund totally separate from your investments,
• 20:54
  optimizing your tax locations, respecting legal
• 20:56
  realities, and of course, accounting for the
• 20:59
  unique, messy circumstances of your life. Which
• 21:01
  all culminates in the creation of your investment
• 21:04
  policy statement. Which makes this document your
• 21:07
  written defense against your own future panic.
• 21:09
  Your survival plan for a 30 % market drop needs
• 21:12
  to be written on physical paper while the sun
• 21:14
  is still shining. Yes. Not typed into a Google
• 21:17
  search bar at 3 a .m. while the market is in
• 21:18
  free fall. Exactly. Which leaves us with a final
• 21:21
  thought to consider. Let's hear it. We are culturally
• 21:24
  conditioned to view doing nothing during a crisis
• 21:28
  as passive, weak, or even negligent. Right. Like
• 21:32
  if a building is on fire, you are supposed to
• 21:34
  run. Of course. But in investing, if you have
• 21:37
  done the deep upfront work of building a comprehensive
• 21:40
  investment policy statement. Doing nothing is
• 21:43
  actually a highly active, fiercely premeditated
• 21:46
  strategy. It takes immense cognitive effort to
• 21:50
  hold your ground. So could it be that the hardest
• 21:52
  work in investing isn't actually finding the
• 21:54
  perfect asset to buy? It's having the iron discipline
• 21:57
  to obey your past self when the entire world
• 22:00
  feels like it is ending. That is an incredible
• 22:02
  shift in perspective. The next time the market
• 22:04
  drops 30 % and every screen is telling you the
• 22:07
  sky is falling, you won't have to wonder what
• 22:09
  to do. You'll just have to open your drawer,
• 22:12
  read the instructions you left for yourself,
• 22:14
  and survive.