Many people have been asking me about the recent sell-off in markets, and the questions almost always involve fear of what may happen next. In my opinion this is the wrong way to approach thinking about markets. There are two ways to invest, one is to win and the other is to not lose. While risk control is essential, the objective of investing needs to be to win, or else you might as well stay in cash and keep your money safe in the bank.
The difference between the two may seem trivial and obviously the reality is that we do simultaneously try to accomplish both, setting out to win first and then if things don’t go well trying to not lose much at least. The mindset of setting out to win means that your mind is focused on finding the opportunities. This is crucial because it means buying into markets at times when everyone else is panicking, believing that their “playing not to lose” strategy is going down the tubes quickly.
Thus my dialogue with anybody about the quick sell-off in the markets we just had is not fear based at all, but one that stems from my knowledge that any sell-off will be followed by a cyclical recovery and in the midst of it super bargains will appear. The vast majority of investors will ignore them because they will be in panic mode about the current valuation of their retirement account, despite the fact that the timeframe during which the bulk of this money is going to be needed liquid to use in real life could be twenty years or more away.
This is even true if you are retired already. Unless you are really stretching your retirement funds – which is never a good idea – you should probably be drawing no more than 5 percent if you wish to keep your principle intact and not eat into it. In this instance you would only draw out 25 percent of today’s value over the coming five years, so 75 percent of the funds at least have a timeframe that can usually see a recovery from most crashes in history.
Also, the biggest lesson anyone can learn about investing in general is that often you make money when you buy, not when you sell. Obviously timing exits are extremely important, but you can’t do a good job managing and exiting an investment that you got into at a horrible price. If you buy at the top of the markets before a crash, because you were playing not to lose and so waited until many years into a bull market when it seemed “safe”, that the economy was doing better, you cannot turn it into a great investment. If you buy at anywhere within 10-15 percent of the bottom, you can sit tight for five years and then figure out how to get the best value out of the investment. This is true in real estate markets as well, and why finding a distressed seller is such a great strategy.
Regardless of what the markets do in the short term, just keep your head on. If you don’t want to sit through a crash and recovery with some of your portfolio, go into cash. If you have cash waiting to work now, just be patient. Bargains are coming. You never know when, and I am not saying they are imminent, but they always have and always will come. Learn to see crashes for what they are, amazing opportunities that only come around once or twice each decade.
David Mayes MBA provides wealth management services to expatriates throughout Southeast Asia, focusing on UK Pension Transfers. He can be reached at david.m@faramond.com. Faramond UK is regulated by the FCA and provides advice on pensions and taxation.
