Charlie Smith
ONE of my favourite comics is the great Harry Enfield, who first came to my attention when appearing on C4’s Saturday Live.
It was the diversity of comic characters that I really admired – having been a budding ‘impressionist’ myself around the age of 10, putting on shows in old people’s homes with my Frank Spencer or Columbo skits.
Both Harry and his sidekick Paul Whitehouse’s performances reflected the mood of the mid 80s in the UK, with colourful characters like the obnoxious plasterer ‘Loadsamoney’ and Stavros the Greek kebab shop owner.
But one of my favourite characters ‘Tim Nice-But-Dim, an endearing ‘upper class twit’, appeared later in his career in his own 90s TV series.
Having just become a qualified financial adviser myself around that time I was particularly amused when Tim was giving advice to his bank manager on investment.
‘Buy high sell low’, he confidently exclaimed, then adding ‘or have I got that the wrong way round? Course I have …sell low, buy high’.
Although Tim’s character is a parody and his advice sounds absolutely absurd, it does serve to highlight the uncertainty of investing for the unwary or inexperienced.
So what’s the best way to handle price swings in stock markets and retain value within an investment portfolio?
This is the perfect time to consider this, given market movements over the last two years, and the general state of investment markets globally.
Balance is the key to surviving these periodic crashes
If you prepare yourself psychologically for a potential bear market ahead of time, it decreases the chances of ruining your portfolio by making unforced errors.
Over the past year there have been a few warning signs of impending volatility appearing in markets.
You don’t need to get fancy with disaster hedges either – high quality short-term bonds have been your best option for preserving capital during an economic disaster consistently in every negative market year since 1928.
They do their job as the portfolio anchor during periods of stress to give investors options for buying back into stocks on the dip or for spending purposes so stocks can be held during a crash without needing to be sold.
Removing some risk from the portfolio and it is suitable for your attitude to risk should result in less sleepless nights when volatility hits.
Don’t panic as stocks fall
Stocks can fall far and fast but also tend to recover very quickly.
That’s why bailing out of stocks after they crash just compounds your problems compared to simply holding them through the crash in the first place.
If you have lost money on a stock investment my advice is to hold the stock unless there is a fundamental reason why that specific stock will not recover.
Balance is the key to surviving these periodic crashes.
The Balanced Asset Class Index which included large caps, small caps, value stocks and bonds fared much better than the all-stock options and outperformed other more aggressive/cautious options over a five cycle 80% of the time.
Diversify your portfolio
The key is always having a diversified portfolio of investments.
The biggest thing is to have a plan and stick with it (everyone says this but it’s true).
You won’t know the exact reasons ahead of time as to why the market will fall, but understand that you will see a handful of market crashes over your lifetime.
There’s no way you can avoid risk in the financial markets if you hope to beat inflation over the long-term and earn a respectable return on your portfolio.
Stocks outperform bonds over longer cycles, which in turn outperform cash but bonds provide stability when you need it the most.
Stocks wouldn’t offer a risk premium over bonds if they didn’t have these periodic large selloffs.
It’s also important to understand your ability and willingness to take risk.
Allocate more money to less volatile investments if you can’t handle losses, but understand that you will likely have to save more to reach your financial goals if you carry a more risk averse portfolio.
Don’t tie everything up
And for those investors that are in or approaching retirement, don’t have money tied up in stocks that you’ll need to use for spending purposes within three to five years or so.
It’s too much of a risk that stocks could take a hit right when you need to sell if you have an all-stock portfolio.
There really are no one-size-fits-all answers to this problem as every investor’s tolerance for risk and investment strategy is different.
Investing really is a balancing act that’s full of trade-offs.
There is a constant tug of war going on inside our brains between fear and greed depending on the market environment.
We want to be able to sidestep losses in the markets and only participate in the gains, but it’s impossible to invest in stocks and not experience periodic losses.
Pick your position and understand your emotional swings.
Maintain a balance of assets within your portfolio and always keep an eye open for a new entry point if stock markets do become cheaper.
Most importantly don’t overreact to short term movements.
And finally remember Tim’s closing remark to his bank manager – ‘never lend money to Charlie’.
