Revisiting Your Risk Tolerance

stress

Stocks ended October with a thump. If you were holding Apple you ended down 9% in the month. This was never supposed to happen. Weed investors that held Canopy from $7 saw their investment hit ten fold to $74.75, only to feel the wrath of Mr. Market 14 days later when it took a 41% dive from the peak. From top to bottom: Facebook is down 35% from peak. Netflix is down 27%. Google is down 17% and even Amazon is down 18%. The sky is falling! What is going on? This doesn’t happen to FAANG.

You can only imagine the messages that I’m receiving from many fellow investors and real estate pumpers. “You should have bought the house.” “The markets are crashing, it’s 2008 again.” “Should I sell everything?” “Should I start investing now? Do you think this is the bottom?”

To the real estate humpers, I responded with my best real estate marketing response. “Markets are normalizing to balanced levels. We are now seeing much greater affordability for stocks across all sectors as fundamentals are still strong. Year over year growth for Apple stocks from October 2017 to October 2018 is still showing robust double digit growth of 19%.”

For the gamblers and market timers: “The next LOTTO Max jackpot is $50M with 6 extra draws for $1M. I really, really feel this is the time to buy and go all in. Last time someone won the big $60M jackpot, the next winner happened 2 weeks after. This is the exact same situation that we are in right now after someone won the $70M jackpot just 2 weeks ago. My logic is sound.”

For those that are still trying to invest and develop a financially stable portfolio to become financially independent, the same always goes. Stay the course. Don’t panic. Re-balance your portfolio if it’s getting too skewed towards equities or bonds.

Emotional Run

Clearly when the markets start getting wild like they are, many people’s emotions start to run wild. This is where people make their gravest errors at investing by performing irrational decisions made on short term market movements. There’s a reason why many people buy at the peak and sell at the bottom. They are acting with their emotions.

Stock gamblers exhibit their greatest emotional breakdowns during volatile stock markets. Many who boast that they’ve made $50k on weed stocks end up crying themselves to sleep because their gains were essentially cut in half. My take on this. For someone that has little experience and lucked out on a stock pick, they should be happy with their current $20k gain. But of course, that was never the goal for a gambler. It wasn’t to grow their wealth through long term investment, it was to make a quick buck. It now seems like the quick money is gone now. Queue the sad song.

To throw more fuel on the fire, just remember that whenever volatile markets arise, the media likes to play on the emotions of investors and individuals. Fear sells and generates clicks. That’s how writers make money. That’s why it’s important to ignore all the doom and gloom news stories that you might find in your Google or Facebook feed. These are people who are trying to capitalize on your emotions. Remember that no one makes money but your broker when you’re trying to sell at the bottom.

Take A Look In The Mirror

Many individuals I talk to that are young and investing think that they can handle the volatility of the market. “Index stocks are for wimps. I’m buying weed stocks and Facebook.” Those triumphant boasts quickly turn into agony and whimper when markets correct.

So how does it feel to lose $15K in one day? Is that something you can stomach? If the answer is no, then perhaps it’s not a good ideal try to pick winners in the stock market. If losing that much money in your investments give you anxiety and depressive feelings, then it’s probably not a good idea to have an investment portfolio full of stocks. So many investors don’t realize it until it’s too late that they have no stomach for a negative stock market. If you’re thinking about selling everything right, then it’s a good sign that going with an investment portfolio with anything greater than 60% in equities is a bad idea.

Remember that a balanced portfolio is the best way to weather the storm. A strict 60% equity, 40% fixed income is generally the most balanced approach for novice investors. Just imagine that if the markets were to correct 20% tomorrow and you were holding a $50k portfolio, would losing $10k make you feel miserable? What if I told you holding a 60% equity and 40% fixed income portfolio would only suffer a $5k drop, would you be able to stomach that easier? Just remember in a balanced portfolio, the larger the fixed income allocation, the less volatility the portfolio will experience. You really have to ask yourself, is the extra risk worth it?

Staying The Course

Remember that investing is a long term commitment. Just like relationships, investment portfolios have their ups and their downs. It’s important to stay the course and not deviate from your original investment thesis of becoming financially independent. If the volatility of the markets keep you scared, then adjust the asset allocations to meet your risk tolerance.

The markets will always have their ups and downs. It’s impossible guess when that will happen. The only thing we can do is mitigate the risk. That said, the current economic environment doesn’t look too bad. The US is still growing. Companies are still profiting and historically speaking, interest rates are still low.

While interest rates are so low, it’s hard to see the economy faltering so soon, but rates are rising, make no doubt about it. The markets will continue to be volatile as interest rates rise because no one likes paying more interest on loans, especially corporations. Thus it’s important to remain cautious. Don’t stretch yourself and chase after easy gains, because those gains can quickly become losses. Remember to keep your investments balanced because no one knows when the next market downturn will be. Most importantly, stop worrying over your investments. In the long term things tend to work out well. So go out and enjoy life instead.

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