I thought now would be a great time to share a potential investment recovery plan admidst a period where the fear of recession, inflation, war and market crashes is heightened.
So, let us begin:
When we first experience a loss, it must have been devastating (especially if the amount is large). For myself, my hands would shake and I struggle to concentrate for the next few days. What ultimately got me through my losses are friends'/family's support and to come up with a plan to move forward.
Step 1: Assess why the loss occurred.
Was it part of your investment thesis before you started investing? If yes, you shouldn't blame yourself too much because every investment has its own odds of winning and losing. It is a necessary risk that you took to earn your returns. The bad outcome chose to happen. If the answer is no, we should be more careful in our investment analysis and make more thorough research before investing in future.
Step 2: Assess your available resources.
These resources can come in many forms. It could be credible advices, past researches, undeployed capital, income, loans and knowledge on various investment tools (margin, collateralized loans, CFDs, options, plain old vanilla investing, CPF Investment Accounts*, SRS* etc).
Step 3: Devise a plan.
Personally, I think that there are three main solutions to consider:
(1) Do nothing. You do not put more capital at risk. If your investment is sound enough, it should survive the short term volatility and recover in the long term.
(2) Continue doing whatever you are doing. I think this is perfect for those who always DCA in a diversified portfolio. You get to buy more when the market is down and buy less when the market is pricey. Emotion is excluded in this strategy and it should make you a very rational investor.
(3) Reallocate your capital. I would plot a mini graph with growth potential (weighted probability of risk and return) on the x-axis and duration required for growth on the y-axis. Then, I will place the companies (already in my portfolio and those that are in my watchlist) on the chart. This helps to decide how to concentrate my investment for the best possible outcome. Often times, you may even realize that it is okay to buy high sell low (BUT buy something else). Do not be too stubborn on holding onto counters that made you lose money, thinking that one fine day, it will come back. We need to consider the opportunity cost of not reallocating capital.
Step 4: Implement the strategy.
Discipline. Discipline. Stick to the plan and don't get influenced by news headlines. If you need to change your plan, it should be based on something factual and evidence based, not due to the whims and fancy of random fear mongering headlines. The purpose of such headlines is to catch "eyeballs" and not provide evidences for you to make sound judgment on your investment strategies.
Step 5: Prepare for the next market crash.
It does not harm to plan in advance. It will definitely be useful, you just don't know when.
These are what I learnt from investing in the past 8 years, going through US-China trade war (I did nothing), COVID-19 (buy buy buy), HK protest/blacklisting (reallocate capital) and now this Russia-Ukraine war (buy using CPF*).
All the best!
*CFP refers to Singapore’s mandatory savings account retirement where SRS is the country’s retirement account. Different country may have something similar using different names. E.g. United States’ 401(k) and Roth IRA.
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