Market roller coaster: What should investors do to protect money?
There is an old investment saying out there, 'a rising tide lifts all boats.' An additional comment could be, 'When the tide goes out, all boats (the good, the bad, and the indifferent) sit in the muck but it doesn't mean they stay there - only temporarily in most cases, until the next high tide. We have seen the volatility in capital markets before, and we will see it again. This time around though, it feels too recent, after the events of three years ago. Even if you don't want to think about capital markets, the financial news stations are relentlessly full of information. The problem is that the more they talk about it, the less the average small investor is able to filter out the complexity to understand how the situation affects them. At times like these, sometimes the best approach is to turn off the media noise on TV if you can, then think about taking a rational approach to the investment exposure that you may have. That means reviewing the fundamentals behind your investments: Why did you invest? What are your goals for this money? Did you choose a relatively balanced risk approach that would tend to minimise losses in down markets? Did you do your homework (or did your financial sales person) on the stability of your investment choices? Have you seen this market volatility before? Where did the market end up, three months, six months, one year later? How did your investment perform in the last bear market? How healthy are the major global economies? We will base this comments on the composite purchase of some mutual funds, rather than pure individual stock positions. If you are savvy enough to buy a portfolio of individual stocks, research them, monitor them, and hedge them, you probably don't need to bother with my comments.
1. Why did you invest? Answer, because you wanted to gain long-term appreciation in securities that will out perform inflation and average fixed deposit returns over the same time frame. Nothing wrong with that approach, but note that the key word is long-term.
2. Did you choose a relatively balanced risk approach? You filled out an investment tolerance profile and chose a risk style that fits your personality low volatility, with consistent stable performance over all market cycles. Is this what you got? In this market, you will surely find out.
3. Did you do your homework by examining the performance of your fund choices over the past 5-10-15 years against their benchmarks and compared to the same type funds in their peer groups. For example: please tell me that this is what you then chose in your mutual funds, and that you only placed a tiny amount in aggressive funds, i.e. returning 35 percent. If you make 35 percent on the upside, be prepared to give back 35 percent on the negative down side the reward may not be worth the emotional sacrifice, short-term.
4. How did your investments perform in the last bear market? In market crises, not all investments fall together, well-managed funds may fall less or even hold their own. They may also return more quickly to performance on the upside you need to look for this type of pattern in your fund fact sheet documentation. Bad years to compare to are: 1987, 1991, 1994, 1998, 2001, and 2008 all of which experienced volatile cycles, market crashes, investor fears, and ultimate recovery. Markets run in business cycles and so do investments in stocks of global corporations. Sometimes, down, often up, but mostly trending upward over the long-term appreciation.
5. Where did your funds end up, three months, six months, one year later after the last market crisis of 2008? Based upon the assessment of your fund information sheets, did they recover faster, slower, or have they still not recovered? How are global companies performing? According to financial media reports of the last few days, many companies are reporting decent earnings, among them, consumer necessities and products. You are still using a car, electricity, purchasing food and consumer items, aren't you? Consider the original goals for which you invested and then apply your own common sense to the equation. If this is a retirement fund, you won't be cashing out for many years. If everything you've looked at looks solid, you may not even want to change your allocations. Get cracking on this review you may be pleasantly surprised to find that your funds have weathered these storms before and you just never noticed. And one more thing: Investing is a zero sum game. For as many investors who watch value disappear, panic and sell - there are opportunists who are will continue to capitalize on the mistakes of the losers. Many investor savvy professionals are looking for opportunities to profit, especially from people like you. Don't give them that opportunity, if it is needless. Martha Myron, JP CPA CFP(US) TEP is an international Certified Financial Planner™ practitioner in private wealth management. She specializes in independent fee-only cross border investment, tax, estate, and strategic retirement planning services for Bermuda residents with United States and multi-national connections, and US citizens living and working abroad. She is a Masters in Law candidate in International Tax and Financial Planning and the Bermuda country contact at the American Citizens Abroad Tax Advisory Council.
www.americansabroad.org. For more information contact
www.americansabroad.org For more information contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners Ltd.