Terror attacks and mass shootings, sadly, seem to be occurring more and more frequently than ever before. With these increases, we are also seeing the level of dramatics increase with each occurrence. Each instance shakes our soul and brings us to our knees. How people react to these atrocities is deeply personal and individual. As it relates to our investment portfolios, however, what lessons can we take from the past? Here are a few tips I’ve put together corralling thoughts from one of the world’s best investors, Warren Buffett.
- “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1”. Do not panic into making a mistake. Apply this rule. After the attacks of September 11th, the S&P 500 dropped over 11% but completely recovered that within a month’s time (October 11th). Your ability to outsmart the market in volatile times is the same as mine- nonexistent. Furthermore, if the markets have declined on an event, they will likely come back within a relatively short period of time. When they do, you can reassess the risk you’re taking inside the portfolio. Selling when markets are panicked, however, is a sure way to make permanent the losses that are likely temporary.
- “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.” Look for opportunity. When markets drop precipitously over an event, there might be an opportunity. Consider changing your contribution allocation to buy a little more of that which you were already attracted to at yesterday’s price. Consider the drop in values a sale. This does not translate into “putting it all on red” as in roulette. Investing a modest cash position during times of volatility can be to your benefit over the long haul but to be sure that you’re not investing on the absolute worst day, I recommend spreading your investment over several days. Market volatility isn’t predictable, especially when it spikes. Without the benefit of a crystal ball, reduce your risk by investing predetermined amounts on a formulated basis (for example: I’m going to invest $2,000 at each increment over the next 6 Mondays for a total investment of $12,000).
- “Risk comes from not knowing what you’re doing.”Consider the goal for your investments. Why are you investing? Many will answer, “Retirement”. So, how far away is retirement? How much money will you require from your portfolio at that time? And, over what period of time will those withdrawals need to last? If you are within 10-years of the stated goal, arrange a meeting with your financial advisor immediately. Ask them to help you calculate how much money you will need from your portfolio for the first five years to supplement social security and pension income. Then determine if you have this much money outside of equities markets.
- “Only when the tide goes out do you discover who’s been swimming naked”. Determine what level of loss would be devastating and limit your loss to that. We know over 90% of a portfolio’s return comes from its broad allocation. How are you positioned on the risk-reward continuum? When was the last time you assessed your risk tolerance? Consider wrapping some guarantees (i.e. stop losses) around your portfolio. There are a lot of different ways one can do this so talk with your advisor about what he or she offers.
- “In the business world, the rearview mirror is always clearer than the windshield”. Know that it is possible to increase a portfolio’s return and simultaneously reduce the volatility it experiences historically speaking. This is done through strategically allocating the portfolio amongst asset classes. Rather than attempting to predict successfully where the market is headed (a task no one can claim they can do), allocate your assets based upon a mix that matches your willingness to take risk that has performed optimally in the past. The past performance will always be different than the future but strategically blending your portfolio and maintaining that mix through periodic rebalancing is the only way I know to do the most simple and fundamental investing tasks- buy low and sell high.
When in doubt, stay the course. Warren Buffet is one of our country’s best known investors and wealthiest individuals who started with little. Continue to invest any time the goal is long-term in nature.
Daniel L. Grote is a Certified Financial Planner® with Latitude Financial Group, LLC an independent financial planning firm operating in Denver, Colorado. They offer complimentary 1-hour sounding board or 2nd opinion consultations on an appointment basis. Call now at 720-881-8741 or email [email protected].