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.

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.

The 7 Deadly Sins of Investing

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There are a few investing errors that many people make — mistakes that are detrimental to their overall investment strategies. Here are the Deadly Sins of Investing that you should avoid…

  1. Not taking your goals into account

Make sure that the investments in your account and their risk levels reflect what you are trying to accomplish. If retirement is 20 years away, and you have your money sitting in cash or bonds, you may not reach your goals. Conversely, if you plan to buy a house in six months, and you have that money invested in the stock market, you might lose your money and not be able to recover the loss in time to buy a home.

  1. Basing your investment strategy on someone else’s risk tolerance

You wouldn’t buy shoes based on someone else’s shoe size, would you? So why would you copy your friend’s portfolio holdings without taking into account your own goals and risk tolerance?

  1. Making too many short-term moves with your long-term money

While buying and selling stock can be fun, it should be done with money that is not intended for your long-term goals. If you are really set on short-term buying and selling, open an account that is just for “play money” and leave the rest of your “serious money” in well diversified, long-term investments.

  1. Having too much money in one investment

If your income depends on your salary from a company, make sure your investments don’t also depend too heavily on the same company. A good rule of thumb is to have no more than 20% of your investments in any one company’s stock — and ideally closer to 10% or less.

  1. Not knowing what you’re actually invested in

You don’t need to know the exact stocks in the index or mutual fund that you have, but you should have a general idea of what is in your portfolio. If you use a financial advisor to manage assets, and you have no idea what they’re doing with your money, ask him or her to break it down for you in simple terms or, graphs and charts.

  1. Basing investment decisions on the news

You can’t predict what’s going to happen in the market based on what you read in the news. It can’t tell you that the stock market is really going to tank tomorrow, and that you should sell everything and go to cash. Research shows that having a well-diversified portfolio that you leave alone is a better strategy than trying to time the market.

  1. Not saving enough

This is crucial. If you aren’t saving enough, it is going to be really hard to get to where you need to be.

For example, say you make $60,000 a year. If you save 10%, or $500 a month, for the next 30 years, with an average 9% return, you’d have around $900,000 to work with come retirement. If you saved 15% and made the same return for the same time period, you’d end up with around $1.34 million. That’s a big difference!

So make a plan to bump up your savings. You don’t have to go from saving 5% of your income to 15% instantly. You can set up automatic increases of 1% every 6 months until you get there.

A Trump Presidency: Stay True to This Old Adage

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American voters have chosen to bring big change to the White House. But resist doing the same with your long-term investments, they will be fine.

Many investors worldwide began to sell late Tuesday (November 8th U.S. time) as Donald Trump looked set to win the presidency. Stock markets tanked from Asia to Europe, and a similarly steep drop seemed likely when U.S. markets opened.

On the contrary, stocks proved resilient Wednesday morning (November 9th U.S. time), benefiting those who sat on their hands instead of selling immediately.

Elections can mean big, fast short-term swings for stocks and other investments. And emotions tend to run high in times like this, so it’s understandable if you find it hard to stay calm and leave your portfolio alone.

But we have to remember, history has shown that volatility after surprise events always die down. There is no logic or reason to why markets go down after somebody is elected as president. Most of this is due to speculative or irrational investing.

Long-term investments are meant to be held for many years to your retirement and longer. Big swings in the interim are normal and should be expected. Volatility is the price that investors pay in exchange for the higher returns that stocks have historically provided over bonds and other investments.

So rather than changing around your portfolio, focus on your career, hobbies and family, and avoid being overwhelmed with information. This is just one of the many events that will ride out itself.

2 Investing Biases that Hurt Your Retirement Savings

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Being aware of our behavioural biases could mean a significant increase in retirement savings. There are two common biases that can affect how we save for retirement:

1. Present bias – the tendency to put more value in current or short-term decisions than the future

2. Exponential-growth bias (EGB) – the tendency to underestimate and neglect the power of compounding investment returns.

A person with present-bias may intend to save more in the future but never do so; while a person with EGB will underestimate the returns to savings and the costs of holding debt.

All is not lost, however, as understanding your own biases is the first step to creating a proper retirement savings plan to fund the lifestyle you want when you stop working.

Self-awareness has the potential to reduce the impact of our biases. For example, a person who is aware of his/her EGB could rely on the market to acquire tools or seek advice, and a present-biased person could use committed arrangements to control the impulses of his/her future self.

It is proven that people who understand their EGB, hence accurately perceived the power of compounding, had about 20% more savings than those who neglect compounding completely.

So what does this mean? Be aware and keep check of your biases, and your retirement nest egg could be a lot bigger.