As I write this article after a 2 month hiatus, a lot has happened these past 2 months. At the time of writing this article, inflation is raging at almost 8% and has been well above the 1.5% – 2% range for almost a year now. Russia has invaded Ukraine, stock markets are bobbing and weaving, oil prices are going up and down. It feels like the world is coming apart. I have had friends call me and ask me, “What do I do? Should I sell my stocks? Should I be doing anything? Well, before I go any further, let me say this – most of my readers know I like to write articles that are timeless and not specific to a time period. So then what gives? Read on…
Take a deep breath, and stay calm Nope, this is not a sit-across-the-couch therapy session 🙂 But I will start with this – first, take a deep breath and calm yourself. Dont over react, dont do anything rash. Dont feel the need to make a quick decision to time the market lows or highs. I want you to go take a nice, long walk or a nice nap, or a long, hot shower – whatever calms you down. I promise you things will be fine. Begin with the basics Before I give you the punch line, I want you to bear with me and go back to basics. Start with your overall financial goals and investment strategy. You had established an asset allocation for yourself and a decision on which assets to invest in. Now, review your current portfolio against that goal and the asset allocation. How does it look? Most people might find their asset allocation is a bit out of whack due to the volatility in asset values. But in some extreme circumstances depending on the type of assets you decided to invest in or a very extreme asset allocation, you might see your portfolio size has dramatically changed. Whatever it is, take stock of things in the backdrop of the strategy you adopted before all this chaos. If you did not have a strategy to begin with, then its time to have one.
Most often, the strategy is to not change anything
This is the real punch line for this article. If your investment strategy is sound, then there is no reason for you to do anything different. I am going to continue to dollar cost average money into the market every single month. I dont care what the market is doing. In fact, i simply ignore the news. Its all noise to me. How come, you might ask? Because in the long run, none of this matters. If history has taught us anything, its that the current volatility is a blip in the radar. Personal finance writer, J.L.Collins in his book, ‘The Simple Path to Wealth’, goes back to this point multiple times in his book by showing us a graph of the Dow Jones Industrial Average (DJIA) over the last 100 years. Below is a view of the DJIA (not inflation adjusted), the gray bars show the different recessions over the last 100 years. You will see there are ups and downs but it does not take a stat jock to say that the trend is noticeably always up – meaning, the market always seems to be going up. At the time of writing this article in Mar 2022 at the far end of the chart, if you squint real hard, you will see the dip that’s happening currently. Why do I show this? Because this dip in the longer run is just noise – its just a blip in the radar.
So assuming you are a long term investor, this short term volatility should not mean anything. But this time, its different! Let me come out and say this – no, its not. Yes, the circumstances may be different, but the fundamental situation is not. Bull and bear markets come and go, supply and demand shocks will come and go. Recessions and booms will come and go. The reasons behind each of these can be different but in essence, if you zoom out, you will see they are all similar in outcomes. From a personal finance standpoint, you need to simply stay calm and even keeled. If the market goes up, dont feel like a genius and do something stupid. If the market goes down, dont kick yourself and do something rash. Just let it be. Yes, I have heard a lot of commentary about how inflation is going to be higher in the coming decade and also, how stock market returns are going to be lower. I don’t profess to be an expert or a forecaster so I cannot comment on that. But what bothers me is how people automatically say the only way out, is to invest all or most of your money in assets like crypto currency or some real risky assets to beat inflation and stock market returns. At this stage, I don’t agree with that and would not recommend making dramatic shifts to volatile assets like Bitcoin for eg. Finally, when I hear people talk about the fact that the entire system is going to collapse and entire markets will get wiped out, nuclear war can wipe out the earth – my response to that is – if that’s going to happen, none of this is going to matter anyway. We have bigger issues to deal with. Notwithstanding my tongue-in-cheek remarks, there are folks who try to build resiliency against black swan events (see link for definition of a black swan event) and some of it is Ok but some of it can be extreme. If you are into building bunkers with food to last years, that’s up to you. So are you saying we should do NOTHING? In general, this is true. Now, if you are a retiree or someone about to retire right away, this might be a real tough time for you and you might be having sleepless nights. Any person who is dependent for income from the portfolio should be asking themselves if they are resilient to the market fluctuations. Meaning, can they adjust their spending to ensure they dont end up over-withdrawing from their portfolio? Or if they have a portfolio large enough that they are already withdrawing only a small % that ensures they will be OK even if their portfolio value goes down in the short run. In my article on ‘How much money do I need to retire?’, I talk about the 4% withdrawal rule of thumb. So are you able to adjust to that as a retiree is the question? If you are not, then what you should strongly consider is going back to work, or finding an alternative source of income. That is because your portfolio was not strong enough to withstand shocks in the first place. In general, people advise re-balancing their portfolio to the planned asset allocation. It’s certainly appropriate to do so but I know some folks advice waiting for the storm to calm down before they do any re-balancing. From my perspective, it does not matter whether you re-balance now or later. The one thing you absolutely can do Tighten your belts. Go back and take a look at your expenses – Marie Kondo your expenses. You might argue thats difficult to do in a time of inflation. I dont disagree but its also a time for you to see where you can cut some expenses. I can assure you this – this is the single biggest strategy that can protect you against any shocks in your financial situation. If you need a lot less money to live, you can survive most economic situations. Concluding comments I mentioned in the beginning of the article that I like my articles to be timeless. Even though I started this article with some comments about the current situation, you have probably realized everything I have said is timeless and applicable during any time there is volatility in the markets. Thank you for reading and I wish you all the best in your financial success!
Disclaimer:I am not a financial advisor and all the information in my articles are from my personal experience and are for informational and educational purposes only. Please consult with a financial advisor or CPA for professional advice.,
Hi! Welcome to my blog! This is a personal finance blog where I want to show you that managing money and your personal finances can be simple. I live and work in the US and I immigrated to the US to study and pursue a corporate career here in my 20s. I am currently in my 40s, work in corporate America, am a personal finance enthusiast, and also a real estate investor. I created this blog to help educate and share my knowledge and hope this can be helpful to some people. Thank you for reading!
