COVID-19 & Your Investment Portfolio

The past couple of weeks have been the most insane period many investors have ever witnessed. The media has done a great job reporting it, there’s a lot of information out there. A lot of us are concerned and we should be concerned.

However, at times like these, we need to examine the facts. The fact is that COVID-19 is an event. It’s not structural, it’s not fundamental. And because it’s an event, we have to look back in history and we know how events like recessions eventually turn out. It’s not an “L” chart – markets don’t get knocked down and stay stagnant. But rather, it is a “U” or a “V”.

What you need, is to be very vigilant about your risk budget – making sure that you’re taking appropriate level of risk always make sense, especially in times of heightened volatility and the volatility we see now is probably going to continue. I believe we may possibly be down as much as 50% from the highs, similar to the financial crisis of 2007-08.

At this point you may question – why don’t I just get out and then get back in? Well, two reasons:

  1. First of all, you can be wrong. (I’ve learnt this the hard way at the beginning of my career.)
  2. Secondly, you would really have a hard time getting back in and the market does whatever it needs to do to prove people wrong.

Stock market volatility is akin to a roller coaster ride, it is dangerous for investors to unstrap themselves suddenly during the ride. Instead, during this period, it is advisable for investors to stay strapped in (invested) and average down the costs of investments in order to benefit when markets go up again.

To this day, I see people who got out in 2009 and never got back in – they missed a complete 10-year bull market. Warren Buffett has said, “The stock market is a device for transferring money from the impatient to the patient.”

And why will the markets go up again?

Historically whenever a recession happens, all of us – billions of human beings worldwide – always put in the collective effort needed to bring up our global economy again. 

In fact, governments are now doing all they can to ride us through this storm. The Federal Reserve has cut interest rates down to 0 – 0.25% to support America’s biggest corporations in meeting liquidity needs. The Bank of England has announced a similar plan. The International Monetary Fund has also pledged to mobilize its USD1 trillion lending capacity to help nations counter the outbreak.

So, don’t get caught up in the short-term emotion and the noise. Take care of yourself. Take care your family. And if you have an investment portfolio with me, rest assured that I’m paying attention to your portfolio during this period. If it needs to be re-balanced (when your equity-to-bond ratio shifts 20% or more), I will contact you promptly for a discussion.

6 Ways To Have Minimum Debt For The Holidays

Christmas is almost here, meaning the shopping season is in full swing. Between gift giving, travel and holiday parties, the expenses add up quickly this season. Many find themselves struggling to figure out a way to pay for it all, and turn to credit cards so they can afford the holidays.

For those turning to cards this year, here are some tips to keep your debt to a minimum:

Create A Budget

The holiday season should not be an excuse to spend wildly. Just like other purchases throughout the year – determine how much money you can afford to spend. If you are using a credit card, you are borrowing that money, which means you can not afford it.

Have A Plan

Make a list of exactly who you plan to buy for and what you want to give them. Once you’ve bought their gift, cross them off. Don’t give in to the temptation of buying additional little gifts throughout the season that are just “perfect for them”. This also goes for who is on your list. You are not Santa, and thus not expected to buy for everyone you know. If you are worried that someone not on your list may have a gift for you, keep a few bottles of wine wrapped up under the tree in case they pop by.

Get Creative

If you have a large group of friends, colleagues or family, instead of buying for each person, try secret santa or white elephant gift exchange.

Borrow Party Clothes

Instead of spending a fortune on a new dress for your work party, see if you can borrow one from a friend.

Sell old items for holiday cash

Go though your clothes and sell the stuff you never wear on Carousell or Refash. You can also post items for sale on Facebook. Holiday Cleaning can especially be a win-win when it comes to kids toys – tell them that to make room for their new gifts, they need to give away the items they don’t play with anymore.

Pay it off quickly

If you do wind up using credit cards, pay off your balance as soon as you can, within the billing cycle, to avoid costly interest charges.

Your Emergency Fund: How Much Is Enough?

As much as we’d all like to, it’s impossible to stop adverse events such as job loss or sickness. If you don’t have the cash to cover an emergency, you’re taking a big risk.

You don’t want to find yourself in need of cash you don’t have, which is why you must have an emergency fund. While it can be hard to figure out how large that fund should be, this article aims to help you decide how much to save in case bad luck hits.

What’s the right amount to set aside?
It’s impossible to know how much an emergency will cost you, but it’s better to be over-prepared than under-prepared. Typically, it is advisable that your emergency fund contain enough money for you to live for about three to six months.  

This should be calculated based on essential expenses you’d keep paying in times of hardship. Have enough to pay for housing costs, food, utilities, insurance, transport, debt payments, and personal expenses. You don’t necessarily need to save enough to ensure you can keep eating out twice a week or to cover other entertainment expenses. The must-pay expenses are what matter.

An emergency fund with three to six months of living expenses could sustain you if you suffer a serious medical issue, can’t work for a while, and aren’t eligible for disability benefits. Or, if you were to be deemed redundant by your employer, it could give you the money to keep making mortgage payments until you find your next job.

In other words, it could mean the difference between a brief period of financial hardship and long-term financial disaster.

How should you decide whether to save three months or six months of living expenses?
There’s a rather huge difference between saving three months of living expenses and saving six months of living expenses – so what size of an emergency fund is right for you? The answer depends on how vulnerable you are to a financial emergency.

Your emergency fund should be more substantial if:

  • You’re the sole or main breadwinner
  • You have an unstable job
  • It would take you a long time to find a new job if you lost your current position
  • You have no other money saved for home or car repairs
  • You aren’t very healthy

The likelier it is that you’ll lose your sources of income or need lots of money to pay surprise expenses, the bigger your emergency fund should be.

When does a smaller emergency fund make sense?
While saving three to six months of living expenses in an emergency fund is a good rule of thumb, it takes a lot of time and financial discipline to put aside this much money. And, there is one situation where you may not want to set this big goal right away: when you have a lot of debt.

If you owe a lot of money, you still need to prioritize building up an emergency fund before paying extra toward debt. If you don’t, you can’t break the debt cycle. While extra payments could help reduce your debt balance, a single bit of bad luck would lead you to accumulate debt on your credit cards again. This creates a never-ending cycle where you don’t make progress – and there’s a big risk that you’ll give up on aggressive debt repayment.

To avoid this problem, save up a mini emergency fund, then switch to bigger debt payments. The amount of your mini emergency fund will also be determined based on your personal situation. Saving $2,000 to $3,000 is a good rule of thumb, and you should aim for a larger amount if income is uncertain or there’s reason to believe you’re at high risk of costly emergencies.

When your mini emergency fund is built up, shift focus to paying your debt – although if you spend your fund, go back to building it up again. After debt is paid down, finish saving enough so your emergency fund covers the recommended three to six months of expenses.

Average is pretty good

If you’ve actually heard the term “dollar cost averaging” before, then you’ve probably some experience in the world of investing — or at least have begun your research.

If this is new to you or you’re still trying to figure out what it is, let’s look at some names that might actually make more sense:

“The Kick Fear in the Face Approach to Investing”

“The Refusal to Time the Market Because That’s Cray Investing Strategy”

“The Buy Every Month and Don’t Worry About the Price Investing Strategy”

Okay, so maybe these terms don’t exactly clarify the meaning either, but at least they get to the heart of the matter.

Dollar-cost averaging is an investing strategy where you invest a fixed amount of money over a period of time so you don’t have to worry about buying into the stock market at the wrong time.

What’s the Deal With Dollar Cost Averaging?

Trying to make money through investing requires two things: buying in at a low price and selling at a high price.

Simple, right? Pay less, sell for more, turn a profit.

Of course, the term “low” or “good” as it relates to prices in the stock market are relative. Who’s to say what a good price even is?

That’s something most of us don’t discover until later after we’ve seen the value on our investments go way up (or way down). And those numbers can change on a daily basis.

Enter dollar cost averaging.

Developed to mitigate the risk of entering the stock market at the worst time. This strategy says forget about price.

Instead, simply buy in at the same time and amount every month and, eventually, the average price you pay will even out all the bumpy fluctuations that happened over the year.

It allows you to get off the stock market price roller coaster and instead, focus on things that actually matter.

Cash Is Still the Riskiest Investment

If you avoid the stock market because you’re afraid to lose your money, consider this:

Thanks to inflation, the value of cash will decrease over time. That means you need more money in the future to buy the same thing you could today, for less.

Even with the volatility of the stock market, historically it increases significantly over the long-term.

So if you’re keeping your entire life savings in a bank account, the value that your dollar holds (meaning how much it can buy) will go down over time, even as your savings increases.

If your goal is to invest but you’re nervous to do so, dollar cost averaging is the most user-friendly way to get your foot in the door.

At the end of the day if you have room in your budget to save money each month, getting some money into the stock market is better than waiting until you land on the perfect time or perfect strategy.

What to do when it gets volatile…

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I hope everyone’s been having a fantastic year and today I’m going to share with you 2 Market Volatility Hot Tips.

During times of stress and uncertainty, Warren Buffett recommends keeping a level head. He recommends that buy-and-hold is still the best strategy.

I 100% agree.

Buffet also said, “If investors are trying to buy and sell stocks, and worry when they go down a little … and think they should maybe sell them when they go up, they’re not going to have very good results.”

Bottomline, as long as your investments are in alignment with your goals… stay away from your investment portfolio.

Here are 2 other tips to help you during market volatility:

1. Rebalance Your Portfolio
If there is a prolonged drop in the market, things get more complicated. Re-balance your portfolio when market volatility picks up. An unbalanced portfolio may mean you are taking on more risk than you think, or too little risk which may not be in alignment with your goals.

2. No Rash Short Term Decisions
When you have investment goals with time horizons of over 10 years, it is most likely best to do NOTHING. Consider the appropriate actions to take based on your financial plan and goals.

And like what American stock investor Peter Lynch says, “Your ultimate success or failure will depend on your ability to ignore the worries of the world long enough to allow your investments to succeed.”

So there you have my 2 Market Volatility Tips. Hope they are helpful!