How to Ride the Stock Market Rollercoaster
As in many aspects of life, balance is essential in one’s personal finances. The current mayhem in financial markets is bringing the importance of financial balance, sharply into focus. After years of “easy” stock market gains, volatility is rattling the financial structure of many individuals and families. Those heavily weighted in stocks or equities are suddenly on a wild ride right now.
Recent sharp declines in the major stock market indices serve as a wake-up call, to many market participants. It seems that in the past few years (and especially during the pandemic) complacency may have lulled many stock market participants into relatively high risk weightings, towards general equities. However, many US stocks, listed on the Nasdaq for example, have recently shed about half (if not more) of their value in short order. Those of us old enough to remember the dot com stock market crash have seen this movie before. But it seems that a new generation of investors may have to learn the same lessons about stock market risk, the hard way.
FEAR AND GREED
With time and experience in investing in financial assets, over different market cycles, wise investors tend to gain an appreciation for a balanced approach to investing. Like a happy and fulfilling life, you need balance with your investing. Often, you have to have some investing blow-ups and your ass handed to you by the markets, now and then, to truly understand and appreciate financial risk. Introspection usually follows losing meaningful sums of money when investing.
The key is to learn from financial errors and improve the construct of your financial weightings. It’s not fun losing money. It hurts. And for some reason, we tend not to forget our painful losses. Perhaps that’s why people are generally more influenced by fear, than greed. Fear of losing money. Fear of missing out. Fear of over paying. You get the idea.
“Rule №1: Never lose money. Rule №2: Never forget rule №1.” — Warren Buffett
A SIMPLE APPROACH
Personally, I am a big fan of a classic 60/40 weighted financial portfolio. Traditionally, it has stood the test of time and dampened volatility. Generally speaking, the 60% weighting is made up of equities and 40% is safe stuff, like fixed income instruments. Personally, as someone in my prime working years, I like the following weightings in my own portfolio:
60% equities
- made up of blue chip dividend paying stocks and a few index equity ETFs.
- balanced geographically (i.e. US and international )
- balanced by sector (i.e. no more than 20% in any one sector such as health care, technology, financials, consumer staples etc.)
25% fixed income
- Certificates of Deposit (CDs), Guaranteed Income Certificates (GICs) or other cash equivalents
- Bonds — a mix of government and corporate. A blend of duration (but I’ve been very short duration the past year or so given the historically low rates we’ve seen). * bond yields have an inverse relationship to bond prices/values. Yields are currently on the rise.
- However, be mindful of the effect of inflation (and rising interest rates) eroding this part of your portfolio
10% cash
- cold hard liquid cash
- provides optionality and is dry powder
- utilize it to take advantage of good buying opportunities
- don’t listen to those ‘experts’ who claim ‘cash is trash’ because it hardly earns you anything in the bank
5% precious metals
- gold, silver and platinum bullion or coins
- physical ownership
- stored securely in a safety deposit box at your local bank
- serves as a hedge against inflation and a long-term store of value
- look at it like insurance for your portfolio
A word about crypto currencies…
- depending on your risk tolerance, you may want to dip your toes into the emerging crypto currency market. Personally, I might consider allocating a very small portion of my portfolio in this area. However, you should prepare for and accept the real possibility of losing most or all of your money in this asset class. Separating the future winners from losers is not easy. This may be an area best left to more sophisticated and risk tolerant investors.
KNOW YOURSELF AND PLAY THE LONG GAME
The aforementioned breakout is just a sample of what a balanced financial portfolio could look like. It could be tweaked as time passes and/or financial conditions change. You could effectively set it and largely forget it. Regular periodic contributions and rebalancing are all that’s really needed. Just let time in the markets do its thing, rather than trying to time the market. Doing things this way has allowed me a more logical (almost mechanical) and less emotional approach to investing. Perhaps more importantly, it allows me to focus on enjoying living life, while my investment plan pretty much runs itself on auto-pilot, in the background.
Everyone’s risk tolerance is personal. Everyone’s life circumstances different. That’s why it’s worthwhile to sit down with a licensed financial planner to discuss your unique situation. Determine your risk tolerance. Explore ways to find the right mix of assets, tailored to you, that will let you sleep easy, no matter what markets are doing in the short-term.
Time and consistency will improve your odds of a more prosperous future. The future is bright and human progress is relentless. Just remember that when the money road gets bumpy from time to time. Stay the course. Your future self will thank you.