How to cope with treacherous investment markets
It’s the nature of investing that there are times when markets fall. Nevertheless, when the falls are large one often feels like a goose and decision making becomes harder. You realise that the pain of going backwards is bigger than the pleasure from positive returns. Investing is an emotional game in the best of times. In the worst of times its all too easy to succumb to behavioral traps, lose sleep or make poor decisions.
To cope in times like now you must rely on PROCESS. Here’s a 5 step process checklist for you:
1 Orientate yourself
Ultimately it’s all about cashflow and timeframes. Prices don’t matter unless you’re transacting. You need to know when you need cashflow and capital back from your investments. Think of your investment wealth as stored in a chest of drawers. Some part of your wealth needs to last for your lifetime. That’s a bottom drawer item and should be invested for the best long term return. Today’s market conditions are of little consequence for bottom drawer investments. Any part of the portfolio you need to “cash in” during the next year or two is a top draw item. Ideally top draw items are already in cash or are easily turned into cash without much downside. So understanding the timeframes of your investments is a big help. An even bigger help is to have a long term plan that you know is feasible and fully costed. Then you know the timeframes and you have a clear expectation of what your investment assets need to earn to support your lifestyle.
Tip – use our free to use on-line Sovereignty modelling tool to orientate yourself before making significant investment decisions.
2 Understand your tolerance for risk
Risk is what you sign up for whenever you invest. Different investment mixes carry different risks and many risks are not apparent. The most important risks to avoid are bad individual investments and having to sell a large part of your portfolio in a downturn. Even good investments carry risk and in general the higher the return expectation, the higher the risk. Everyone has a different tolerance and needs to be able to sleep soundly at night even in severe market downturns.
Tip – understand your risk tolerance and translate that back into an appropriate mix of long term investment assets that matches your tolerance. Contact us for free access to our on-line risk tolerance assessment and reporting tool.
3 Follow a sound investment process. Most private investors don’t.
Every successful investor follows a disciplined process that’s appropriate for both up and down markets. Private investors are often burnt through inexperience, lack of quality research and the psychological traps of poor investment decision making. Sadly you’re unlikely to find a winning process anywhere in the frenzied 24 hour media cycle. That’s because successful long term investment is mostly about slowly unfolding success stories. They are not controversial and far too boring for the headlines. In fact one big advantage most private investors have over professional investors is a long term timeframe, one that can look beyond present uncertainties and consider how the prices of enduring businesses have suddenly got cheaper. The mainstay of Sovereign’s approach is to tap into a multitude of investment experts who manage risk well and have beaten market averages over the long term. We carefully consider their preferred positioning from both a short term and long term perspective.
Tip – if you don’t have your own tried and tested process, use someone else’s. Someone with a great record through thick and thin.
4 Keep the score and take soundings of expected risk and return in your portfolio
Do you know what your investments have been returning and what losses you should expect in a serious bear market? Your investments need to be benchmarked for performance, each pulling their weight over the long term and consistent with your risk tolerance. Most importantly you need to be comfortable that you can survive a serious bear market scenario and still be around for the inevitable good times to come. This is a large part of the advice work we undertake with our clients.
Tip – Our Sovereignty modelling tool publishes risk and return expectations for different portfolio types. This can provide a starting point for your own scorecard.
5 Take action as necessary
Don’t become hostage to chance, inaction or delusion.
Irrespective of market conditions, you should be feeling that your investments are optimised to deliver you a realistic and satisfying future lifestyle.
Tip - If you need expert advice or decision support, don’t hesitate to contact us.
Disclosure Statement: This communication has been approved and issued by Sovereign Wealth Partners Pty Ltd ABN 18 607 071 367 Corporate Authorised Representative (No. 001233909) of Sovereign Capital Pty Ltd ABN 44 164 127 833, AFSL 456235.
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