Sometimes I can go many months without checking my investment accounts. Why worry about money that is not needed for many years?
A lot of commentary now is from people worried about their stocks losing value and crashing. Yet I remain calm and couldn’t care less to be honest. Not even an inkling of temptation to sell anything. I am hoping if you have been reading my blog for some time, you feel the same too.
So, how can you too get to this zen like calmness?
Remain diversified
By investing across many asset classes such as stocks, bonds, real estate, cash, and even gold or bitcoin if it floats your boat, you can lessen the impact of a crash in prices. For example, if you have $100,000 in stocks and $40,000 in bonds and cash, and experience a 30% reduction in stocks and no change to bonds, you will be down $30,000. Whereas if you had all $140,000 in stocks, you would be down $42,000. The differences only becoming more pronounced when you have more money.
The idea behind diversification is that not all asset prices move in the same direction at the same speed at the same time. Some asset classes will help absorb the losses by not losing as much, or even gaining in price.
As well as asset classes, you should also be diversified across geographies and industries too. Having all your rental properties in one city can be highly risky, as can having too much of your stocks in New Zealand or in one industry such as technology.
I don’t have any investment real estate at the moment, but never say never. But I am still comfortable with my diversification across industries, locations and asset classes. I achieve this through just 5 funds:
Superlife Smartshares total world fund
InvestNow Harbour Asset NZ50 fund
Superlife Smartshares US Value fund
InvestNow Milford Corporate bond fund
InvestNow Smartshares aggregate bond fund
Please don’t take this as personal recommendations for you. They work for me, but your situation may be different to mine.
Because I am invested in thousands of companies, in many industries, across the world, I am not worried about being wiped out by a single country, asset class, or industry.
Many people now worried about large crashes are those who have also done the best over the last couple of years. Gambling on a few individual stocks that have done exceedingly well. But now, those same stocks are getting hit the hardest.
This is the price of taking on a lot of risk and not diversifying accordingly in the first place. You can’t have it both ways. There are many individual stocks getting crushed at the moment, but many international indexes are only down slightly. You can’t take in all the wins and not want the losses too.
Diversification means you will never strike it out the park with big winners, but you won’t be the biggest loser either. And the number one rule of investing is never lose money.
Money for the long term
Which brings me to the second reason I am not concerned about market crashes.
I have split my money up so that money for the short term is invested more conservatively (predominantly cash and bonds) and money for the longer term is invested more aggressively (predominantly stocks).
As stocks tend to be more volatile in terms of ups and downs in value, it can be incredibly risky to expect to cash out of stocks in a time period of 5 years or less. It hasn’t occurred recently, but it can take up to a decade or longer for diversified stocks to recover from a large loss. I know many people that have their downpayments for a house in stocks and that could end poorly.
But I don’t plan to use any of my money in stocks for much longer than that. What does a decrease in price matter if you don’t need to cash it in? I am confident that over the long term, the value of a diversified portfolio will increase over the long term, even after a substantial drop.
Plus, while I am in a position to save and invest, I get to buy assets at discounted prices.
Timing the market
Many who have sold recently are now in a position of having to time the market twice. This was a significant problem when Covid first entered NZ, where many switched their KiwiSaver accounts from growth to conservative. First, cashing in some losses (expecting more drops in value), but then not knowing when to get back into the market.
The markets recovered so quickly and continued to climb, I do wonder if some people are still in conservative funds just waiting.
If you have available cash then you need to be sure of two things:
1/. There will be a better time to buy than now
2/. You know when that time is
I have been comfortable in the fact that all my money has a job to do each month, and I am not interested in trying to time my investing. I don’t know when the optimal time will be, and I doubt anyone does.
I come back to my point about asset allocation. If you have your long term needs covered by long term appropriate investments and short term needs covered by short term appropriate investments, then you shouldn’t be worried about trying to time any asset purchases and sales.
Head in the sand
I take the head in the sand approach when it comes to checking my investment balances. If I know there is a good chance that asset prices have gone down when I want to check my account balances, I don’t check. The companies I invest with, InvestNow and Superlife, are fantastic for me, because they don’t have fancy apps, nor do they regularly send out communications. This makes it very easy for me not to check and it works fantastically well. The more you check and see real money being lost, the higher the chance of being stressed out and making panic based decisions.
Likewise, when I know markets are going up, I check my balances regularly.
May seem silly, but it really does work. At least for me anyway.
Avoiding greed
A lot of people panicking now, got greedy on the way up. Many assets have gone up in price astronomically over the last couple of years. As this happens, more and more people want more and more. Diversification takes a back seat and speculation hops into the drivers seat. But these assets are the ones that have been getting hit the hardest.
I have no problem watching other people get rich without it affecting my plans as an investor. I am of the slow and steady mould, and it has served me fantastically over the years.
Others get too greedy on the way up, and suffer big losses on the way down. Just look at all the property developers that have gone bankrupt over the last 20 years in this country.
Rebalancing
Once a year I rebalance my assets back to their original allocations. Over a year, some assets can increase in price much more relative to other assets. This means taking on more or less risk than originally intended. By rebalancing my portfolio, I bring that level of risk back to my desired intention. If I just let the assets ride for many years without rebalancing, then I could end up experiencing far more risk than I want. This rebalancing is what allows me to keep my asset allocation as planned and what allows me to sleep at night.
Faith in the markets
I have faith that the companies that make up the various indexes I am invested in will continue to innovate, remain productive, and remain profitable. Sure, some individual companies will fall and not recover. That is the great thing about diversification. You get to retain your confidence that countries and companies as a collective, will continue to progress as they have done over x number of years. New companies will come in, old companies will fall out. If you are diversified you don’t need to be worried about which one to invest one. You benefit from the productivity of the markets as a whole and should be confident that markets will progress over the long term.
market Expectations
Finally, I know that losses happen frequently. And if they don’t, that is an anomaly. Losses hurt the most to those who don’t expect it. Expect it and prepare for it, and you should be in a good position to ride it out.
Final thoughts
Because I am invested across a wide range of assets in a way that fits my investment timeframes, all my money has a purpose. I am comfortable with my investments, I have no worry about a drop in asset prices.
You can’t be greedy with your whole portfolio and be prepared for a downturn at the same time. If you want to take a chance at going for all the upside, you must be willing to take all the downside.
If you are cautious on the way up and follow the rule to never lose money, you are most likely to remain invested much longer than others dipping in and out of the market. Not only that, you will remain calm and not be worried about investments all day every day. The most important part of a sound investment plan is that it allows you to forget about your investments and get on with living life.
If you need help determining an ideal asset allocation for your situation, then don’t hesitate to get in touch. This is one of the fundamentals that you should have right. I don’t want to hear about more people losing their shit over seemingly small drops in the market. Life is too short to worry about investing. If done right, investing is what should free you of your worry.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here