Finance 4. Doing nothing remains a viable strategy One of the surprises of the corona-crash is how quickly it happened − and how quickly the market has (seemingly) recovered from it. And here’s another lesson for investors: often the wisest and most prudent way to respond to a market downturn is to not respond at all. Don’t get us wrong here: the strong-of-nerve and steely-of-stomach canmake a lot ofmoney during a downturn by jumping into and out of stocks when everyone else is running away from them. But many of us simply aren’t cut from that cloth. We have better things to do than constantly watch stock prices, read through investment analysts’ reports and try to guess the exact moment when we should go “all in” on a market recovery. And that’s OK. The fact of the matter is, for those of us who have built well-balanced, well-diversified portfolios that hold a number of asset classes, market geographies and risk exposures, often the best thing to do is to do nothing…and simply wait. Yes, such a “standing pat” strategy may mean that we miss out on some opportunities to pick up great investments at bargain prices. But, as the corona-crash has taught us, doing nothing is usually better than cashing out in a panic and then trying to rush back in when the market 5. Keep speculations manageable It’s an old truism that the first casualties of any correction are high-risk, high-return speculative opportunities that offer “binary” outcomes: they either succeed spectacularly or they fail completely, with very little in-between. In good times, when ideas such as bitcoin, marijuana stocks, junior oil and gas producers and other such can pay off handsomely, it’s easy to get lulled into a false sense of security about the nature of such investments. When every stock in the market is going up, risk and reward seem to be disconnected: the risks don’t seem all that big, while the rewards seem absolutely huge. And the “fear of missing out” on big financial rewards becomes too much for us to bear. Once again, the corona-crash proved that, in times of crisis, the speculations are the ones that can weigh down your portfolio. Sure, the whole stock market suffered. But small-cap stocks were hit harder. Marijuana stocks took a real beating, as did crypto-currencies and blockchain-related companies. Meanwhile, in the commodities sector, there were many junior miners and oil and gas exploration companies that simply didn’t survive. Will such opportunities ever “come back” and allow investors to recoup their losses? Maybe some of themwill. But do you even need such positions in your portfolio? Most professional financial planners will tell you that by the time you become a snowbird, you probably don’t need to swing for the fences financially − keeping what you have is probably more important than accumulating more. If youmust speculate, make sure to keep your speculations manageable. Exactly how big (or small) is “manageable”?The answer depends a lot on you: the size of your portfolio, your age, your tolerance for risk, and how much time and energy you really want to spend keeping track of all of your positions. A general rule of thumb, however, is to keep speculations to no more than 5% of your portfolio − or whatever amount you could tolerate losing completely, whichever is less. That way, even if your gambles go bust, you won’t have to sacrifice your lifestyle to make up for your losses. 6. Emotions matter You’ve probably heard about the “cycle of emotions” − often expressed as a kind of illustration that charts the back-and-forth between optimism and pessimism as the stock market moves through its natural boom/ bust cycle. As the stock market soars, our emotions move from excitement to euphoria. As it sinks, our emotions move from anxiety to fear. The implications of this emotional rollercoaster can be powerful. As the market moves through its cycle, our emotions can distort our reactions to market events. When we are guided by our emotions, we can easily react to short-term events in ways that overwhelm rational decision-making and directly contradict our long-termfinancial best interests. Which leads us to another lesson that the corona-crash has taught us: the most powerful determinant of long-term investment success is not your IQ, your education, your skill at reading investment trends, your knowledge of secret trading algorithms or some inside information which you may have about XYZ stock. Rather, it’s your ability to control your emotions. Do you have the ability to “distance” yourself emotionally from shockingly quick stockmarket movements? Do you have the patience to wait out times of extreme volatility? Can you put aside your tendency to react to short-term events and, instead, stay focused on your long-term goals? Those who can learn how to do that are the ones who will likely see the best investment performance if a “second wave” of virus-related disruption actually hits the market. And, in any other market environment, for that matter. 30 | www.snowbirds.org
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