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Investing’s ‘Black Spot’

Take a close look at the chart below; in particular, at the sad little dot on its own in the bottom left-hand corner, the one that’s ringed just in case it’s not obvious enough, isolated far from the vast majority of dots congregated together. It’s by itself for a reason. It’s ostracised because it is harmful. In its way, it represents what’s most dangerous about investing. Don’t think of it as a dot, but as a spot, perhaps even as the Black Spot of investing, the equivalent of the eponymous Black Spot that foretells death in Robert Louis Stevenson’s Treasure Island.

Okay, that’s over the top. Even so, this spot is significant. It is a great example of an outlier; an event that can wreck an investment portfolio’s performance, just as this particular spot had a jolly good go at wrecking the Bearbull Income Portfolio, whose monthly returns are shown in the chart.

Almost every long-running equity portfolio will have its own black spot, the short period that does outsize damage to overall performance. The only questions are: are you monitoring your fund sufficiently well to know when the damage was done, by how much and why? Linked to that is the supplementary: what can be done to limit the Black Spot’s virulence?

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