Stay buckled into your seat until the markets recover properly. Instead, ask yourself these 5 simple questions


By Sam Instone - November 16, 2022

Are you questioning whether you have the right mix of stocks, bonds and cash?

You're not alone.

This is normal behaviour when markets plunge.

Bear markets have a habit of reminding us of the risks we’re taking...Discovering your risk tolerance is lower than you thought, is useful to know. 

But try not to act.

Even after Thursday’s rally, the broad stock market remains down some 16% for the year-to-date and the bond market is off 14%.

Use all the strength you can muster to stay in your seat until the stock and bond markets recover.

With that in mind, here are 5 questions you might want to ponder:

1. How much do I have in bonds?

I believe we should expand our definition of net worth, and include as much as we can in our financial life.

Current or expected pension payments, or for those still in the workforce, our income-earning ability.

It’s tough to put a value on these bond-like streams of income, but they are valuable.

Include them in your net worth, and this year’s market losses will seem even smaller.

Let's not forget, we need to subtract the debts that we have, where we don’t earn interest but rather pay it to others.

An upside of today’s rampant inflation: These debts are now less of a burden in inflation-adjusted terms.

2. How much will I save in the years ahead?

You can think of future savings as part of your portfolio’s cash holdings - and that future cash makes our investment mix more conservative than it might otherwise seem.

Expect to save £100,000 between now and when you retire?

Think of that as £100,000 in cash sitting in your portfolio, helping to soften today’s losses.

An added bonus: Including future savings offers a simple way to factor your income-earning ability (human capital) into the value of your portfolio.

3. What’s my true net worth? 

As discussed in point 1, your net worth includes not just your stocks and bonds, but also property, bank accounts, vehicles and more.

When we look at the big picture, we may find that our portfolio losses in 2022 are relatively small.

And perhaps less distressing. 

4. What’s my time horizon?

You might spend part of your savings over the next five years.

But most of our clients have no intention of touching much of their portfolio for 10 years and beyond - and that includes retirees.

Remember, buying a home and putting a child through college are financial goals with harsh deadlines.

Retirement is different.

We might spend down our nest egg over 30 years - and most of us aren’t aiming to have nothing left by the time we complete our final transition in life.

5. How much cash will I need from my portfolio over the next five years? 

If you need money over the next 5 years, don't place it into stocks and riskier bonds. 

Perhaps placing them into short-term bonds instead. 

Because, while a bear market may be around for longer than we'd like, we should see some sort of recovery before five years are up.

Ask yourself how much cash you need from your portfolio over the next five years.

If that money is already sitting in more conservative investments, there’s no reason to sell stocks or riskier bonds at today’s depressed prices.

 

This year’s investment losses have been painful.

Many investors may now wish they had a less risky portfolio.

But remember, the science of success lies in our behaviour.

Research from Carnegie Institute in 1906 showed that 80% of our success at learning and achieving things was attributable to mindset.

Generally, we're operating on autopilot, governed by our conditioned habits, 95% of the time.

We’re human, and want to play safe. 

We also still do things today, 95% the way we did them yesterday.

Fight against your natural (normal) tendencies, and stay in your seat. 

If you don't have an immediate need for spending money, don't sell at today's prices. 

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