The financial market had a turbulent start in 2022. From the stock market to cryptocurrencies, everything seems to be falling. What should investors do now? If this is the first time that you are experiencing a market downturn or you feel lost, you should continue reading.
Believe it or not, the stock market crashes almost every year. I almost run out of titles for the articles written during a stock market crash like now.
- 2021 December – Will Omicron crash the global stock market?
- 2021 September – How to deal with investment loss?
- 2020 March – Stock market plunged: should you buy or sell now?
- 2016 January – How to survive a stock market crash?
- 2015 August – How to invest in a stock market crash?
- 2011 August – What to do when the stock market crashed
Every crash is different yet similar. Some are excited that it is a golden opportunity to buy more; some are worried that they are going to lose their life savings; some has called it a quit and gave it up altogether.
Why do people have a mixed response to the same event? It is because different people have different objectives when they come to the same stock market. So this year, let me talk about how to align investment goals with your investment strategy and three things you can do now.
In the financial market, there are many different participants: some want to grow their wealth over the long term; some want to make quick bucks over a short term, but most people do not have a clear objective why they invest in the first place.
This may sound counterintuitive, after all, everybody is here to make money, isn’t it?
Yes, through my professional work, I heard about it all the time. People always talk about returns without knowing what they are getting into and everybody is a long term investor until the market slaps their face.
If the Covid-19 pandemic forced you to rethink your life and work, a stock market crash is an opportunity for you to re-evaluate your investment goals. When you really start to set your goals and write them down, I promise your life will be different.
If you don’t know, it doesn’t matter
We are all familiar with Lewis Carroll’s story “Alice in wonderland”.
One day Alice came to a fork in the road and saw a Cheshire cat in a tree.
“Which road do I take?” She asked
“Where do you want to go?” responded the Cheshire Cat.
“I don’t know,” Alice answered.
“Then,” said the Cat, “it doesn’t matter.”
Have you ever drifted through life aimlessly, wondering why your life lacks purpose and significance? That is because you did not bother to write down your goals.
It is the same when it comes to investment. Being in the financial advisory industry for more than ten years, I have only come across ONE person who ever had a written investment goal for himself.
King Solomon once said,
Where there is no vision, the people perish.
While that sounds a bit scary, the truth is that most people are not clear about what they want, even though they think they do. If you don’t have your own goal, you tend to just follow what other people claim that they are doing. Things like
- Buy Tesla stocks to become a Teslanaire;
- Buy cryptocurrency because the global financial system will collapse;
- Buy NFTs to turn $300 to $30,000 in a week;
- Buy ETFs and hold for the long term;
- Use Robo-advisers because they use Nobel Prize-winning investment models.
I am not here to debate the merits of these claims. I just want to highlight to you that if you don’t know what you want, people will feed you what they want you to believe so they can make something out of it.
If you don’t know where you are going, none of the investment strategies matters.
Setting goals force you to clarify what you want
Most of the time, people invest, thinking that they want to make as much money as possible in the shortest time. In the earlier days of my career, I made the same mistake.
Even when I made good money through investment, I have never felt the same excitement as I had expected.
Now think about it, if you are a businessman or a busy professional, you have your house, a car and a healthy balance in your bank account, do you feel richer if you see 5% or 10% profit in your $200,000 investment account? Probably Not.
But you will definitely feel uncomfortable if you see that your account drops $10,000 last month.
When you are in the middle of a meeting, would you want your banker or broker to call you to make some urgent trades or top up the account due to a margin call? That will definitely screw up your day.
When you are home after a tiring workday, would you want to check your investment statement, follow up on the never-ending news of the stock markets, or do you prefer to spend some time with your family, have a good meal, talk about anything other than money and work?
The truth is, you don’t want a new “investment strategy” or “investment opportunity”, but what investing can bring to you.
That is why the goal of investment is NOT just about making money. It must align with your personality and life goals.
Your investment strategy must align with your life goals
In real life, it is very hard for you to get excited by the cold numbers in the profit and loss statement, but it is easy for you to suffer emotionally for any bad investments.
You need to understand most investment strategies are designed for investment professionals, be they trained or self-taught.
There is this fact that many people refuse to admit. That is, there are many people out there making a living by full time investing, either for themselves or for the institutions.
Do you really think by spending 15 minutes a day, you can pick the next super stock or make multi-bagger gain from stock, forex or crypto trading? Even if you have the intelligence and luck, you may not have the temperament.
Related reading: Are institutional investors smarter than retail investors?
So my conclusion is that most people are not suitable for trading unless you want to make it a career.
What if you just want to preserve and grow your wealth?
The financial academia invented risk profiling by scoring people’s risk preferences into numbers. They then classify the investment products into aggressive, balanced or conservative and sell them to people who match the numbers.
The assumption is that low volatility, low return products such as bonds are safer, high volatility, high return products such as stocks are risker.
That is where things get wrong. Because you are investing based on what is marketed to you, not based on your financial goals.
For example, if you are near retirement, conventional wisdom tells you that you should scale down your investment and be more conservative. But in today’s environment, investing in bonds is probably more dangerous than ever. Mathematically, a bond investor will lose money when interest rates go up. So should a retiree invest in bonds just because “traditionally” the retirees invest in bonds?
On the other hand, a typical businessman will be classified as an aggressive investor because naturally, businessmen are risk-takers. But in reality, if you have already exposed your life savings to great business risk, should you also risk your investments by setting a high targeted return? If you treat your own human capital as an investment product, isn’t it that the rate of investment return of yourself is much better than most of the investment instruments out there?
What if you say that you are too afraid to invest? Then you need to ask yourself, do you have enough money to spend for the rest of your life? If not, what else can you do to boost your wealth? The ironic thing is that people often say investing is unsafe, but the real reason most people invest is that they have no security in life. The hard truth is because of inflation, most people will run out of money if they don’t invest.
Related reading: Investing for retirement: 3 “In”s you must overcome.
So what should you do now?
#1. Review your financial plan
First of all, I think you need to revisit your investment objectives. This may seem mundane, but it is essential. If you don’t know where you are going, your investment outcome doesn’t matter. Ask yourself
- Did you invest for retirement or for your children’s education?
- How long is your investment horizon? Is it 5 years, 10 years or even longer?
- What is the ultimate goal that you want to achieve? Is it a lump sum of $300K for your kid’s university fee or is it a passive income of $5k per month for your retirement?
- What is your preset risk tolerance level? Can you accept a 10% downside or 20%? Or is it relative to the stock market?
If you haven’t set your goal, check out this guide on how to set a SMART Financial Goal.
It is best that you have a written plan and a system to track your investment returns. But most people analyze their investment performance in the wrong way. I strongly suggest you read this article to understand how to measure investment performance.
Additional reading: 3 Things You Don’t Know About Investment Performance.
#2. Evaluate your investment portfolio
Secondly, you need to evaluate how is your investment portfolio perform compared to the broad market? When the market is up, everybody is a genius. Only when the tide goes out do you discover who’s been swimming naked.
Yes, the stock market crashed, but the important questions are:
- Did your portfolio drop more or less compared to the market?
- What is holding up well and what is detracting the performance?
- Did you make or lose money because of luck or a deliberate decision?
The thing is to note here is that don’t over-focus on an individual position, but look at the overall picture. If you have 10 positions and 1 or 2 positions have done very bad, it is ok. What you don’t want to see is that the movement of the investment did not match your investment theory.
For example, some people claim that cryptocurrency is hedging against inflation or stock market crash. The recent movement obviously doesn’t justify that. Some people invest in bonds or some other “safe investment”, only realize that their portfolio has fallen more than they expected.
#3. Cut losers and move forward with new opportunities
Thirdly, you need to cut your losers if your investment thesis is wrong. And this is the painful part because most people invest by looking at the rearview mirror.
It is very easy to get people to buy into an investment idea but it is hard for people to cut losses. This has to do with some of our human cognitive biases.
We tend to anchor the value of our investment to the price we bought. So people always think they should hold on to a “paper loss” and sell only when it recovers in the future.
At the same time, it is also hard for us to accept that we have made a mistake due to our ego. As James Thomson said,
Men who have participated in a decision develop a stake in that decision.
So it may be helpful to get a second opinion from another person. While the obvious choice is your own financial advisor, you can also ask your friends or in the investment forum. But you need to be mindful of two things:
- Is the person offering you advice not only competent in investing but also ethical?
- Does the person have skin in your game?
While both seem to be a no-brainer, it is not easy to find. I have seen so many influencers pushing NFTs to their audience just because they are paid to create the hype.
On the other hand, some people may genuinely want to help, but they are limited by what they know about investing. Sometimes people may sound very confident because they don’t know what they don’t know. Check out what Dunning–Kruger effect is.
Once you free up your funds, reshuffle the portfolio and invest in other opportunities.
Let me summarize…
You need to have a written investment plan that aligns with your life stages and financial goals.
Yes, the stock market has crashed and you may not feel well about your investment. But I promise you that when you look back years back, it is just a blip of your investment journey.
But this doesn’t mean that you should just sit and wait. You should evaluate your investment portfolio and take this opportunity to make the necessary adjustments to rotate out of the sectors with headwinds and rotate into sectors that may perform well given the current market condition.
As discussed in my earlier article, inflation and interest rate hike will be the main theme in 2022 but it doesn’t mean there won’t be new changes. China may be the black horse and the regulatory intervention will come in if the stock market goes out of control. For any crisis, there are many opportunities, only if you look forward instead of the rearview mirror.
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