Your investment gains of the last 12 months are making you feel invincible? What will you do the next time the market drops 20% or more? Are you emotionally ready to manage your greed and fear?
A well-defined investment strategy serves two purposes:
- Aligns your investment portfolio to your financial position, investor profile, time horizon, and your goals.
- Helps you manage your emotions throughout the market cycle of boom and bust.
Contrary to what many believe, the majority of the resulting performance of an investment portfolio is driven by:
a) Asset allocation rather than security selection and
b) Discipline to invest for the long term rather than trying to time the market.
The best time to draft an investment strategy is before starting to invest. The second best time is perhaps when you have started to invest without a plan and have neither won nor lost an amount that excites or hurts you too much. Maybe the worst time to develop an investment strategy is when your emotions are running high, either with euphoria or panic. Emotions curb your rational thinking. Emotions can shift as quickly as Dr. Jekyll transforms into Mr. Hyde. Both greed and fear are the two sides of the same coin.
If you have made investments during the last year, chances are you are winning.
After the short-lived crash experienced in March of 2020, basically, every kind of asset has risen in price. Here are some examples of prices changes from March 16, 2020, to May 14, 2021:
- Stocks (S&P 500 & NASDAQ): +75% and +92%, respectively.
- Bonds (BND): +3%
- Real estate (BBRE): +56%
- Oil (USO): -8%
- Timber (WOOD): +124%
- Copper (CPER): +92%
- Corn (CORN): +49%
Some assets have seen significant price appreciation, for example, cryptocurrencies.
However, during the last few weeks, we have seen technology stocks and cryptocurrencies fall in value. But keep calm. The important question is: are you ready to manage, and benefit, from the volatility of the future? If you are not, then it is time to develop or refine your investment strategy. This will help you to keep your emotions of greed and fear in check.
We at Fivent are advocates of investing with a long-term horizon (>10 years) and in a way that is aligned with your financial position, investor profile, and goals. However, we understand some people may prefer to invest with a shorter-term horizon and perhaps even to invest in a way that is not appropriate according to the other factors mentioned above. Regardless of your preference, I believe that it matters that at least you are self-aware of the position you are putting yourself into.
Also, whatever you decide, decide now. If you think the market is quick on its way up, you’ll be surprised how incredibly quick it can be on its way down. All the gains you’ve accumulated in years or months can be wiped out in weeks or days.
Some people think they can sell right before the market starts to fall, those people are usually wrong.
If you’re riding a big winner, you need to have a plan. You can decide to hold it or sell all or part of your position. Whatever you decide, what matters is that you have a plan. Because when prices start to fall you need to know if you are going to sell or buy some more.
These moves happen faster than our capacity to process them, so you would do well to know how you are going to react before they happen, not after.