Bloodied But Continuing to Put One Foot in Front of the Other
My portfolio has lost over 7% over the last two days alone, experiencing a sharp pullback from its all time high after a nice green day on Friday.
This volatility can rattle the best of investors, and I’m not going to lie… I felt rattled. At one point this morning, my entire portfolio had actually declined over 10%. When your in the moment, it is tempting to hit the sell button. A few clicks and back in the “safety” of cash… or the supposed safety of cash.
When I experience this type of visceral reaction, I actually have a checklist that I work through to remind myself to step away from my crazy snowball of emotions rolling downhill. I read out loud the following statements to reframe my perspective. Vocalizing it seems to help me more.
1. Remember the difference between potential losses and actual losses.
When I purchase a stock, the value of that share varies dependent on what someone else is willing to pay for it. The value can rise or fall. When the value changes, it’s easy to state, “I just made $X” or “I just lost $X” but in truth those are potential gains/losses. Until the sell button is clicked, everything is just potential and not actual. I could have realized a wealth of actual losses this morning after getting rattled, and then I would have missed the strong rebound that occurred throughout the rest of the day.
2. Zoom out the chart.
If I focus on the day, then my investment account amplifies the losses. To gain much needed perspective, I just zoom out my time horizon and realize that I am back to where I was at the beginning of February. See the Nasdaq QQQ chart below for the last 3 months. Easily better than I was three month prior, and much better before even what’s shown below.
3. Investing is a PART of our financial plan.
Having a financial plan in place is key for any person thinking about investing. But more importantly, investing should not be the only part in the plan. My wife and I have an emergency fund, varying asset classes, real estate, multiple sources of revenue, and so much more that will help offset the reliance on the success or failure of our investments during the short term.
4. Don’t forget your dry powder.
A key strategy of mine is to have cash or cash equivalents (dry powder) readily available to take advantage of pullbacks in the market, and yet I sometimes forget about them. Normally I keep cash in my portfolio, ranging from 5%-10%. I have my pre-merger SPACs that also store cash (and which I tapped into today). And each month my wife and I raise cash from our salaries to put into investments.
5. Nothing has changed in the investment other than the price, so take advantage of it.
If I was happy to buy Redfin (RDFN) at $90, then why wouldn’t I be just as happy to buy Redfin at $78. Nothing changed in the company. People didn’t stop using the internet. People are still buying and selling houses. And Redfin is still disrupting the industry as they work to build a moat. So today I used some of my dry powder above to increase my position.
6. I am in this for the long term.
I don’t buy any company for the short term. There may be short term growth catalysts that have me encouraged, but it is still only as a part of a larger and longer term growth story. I’ll tell you in 3/5/10 years how the Redfin purchase worked out.
It’s All Perspective
My strategy helps me, especially since I enjoy reading about and watching the market every day. On Twitter today, another investor deleted their investment app in order to stay away from watching the returns. The volatility is what allows for the price increases over time.
A high interest savings account returns 0.5% per year right now. Inflation (or the increasing prices of goods that consumers buy) could potentially be over 2% this year and has averaged 1.75% over the last ten years. So my cash and savings rate isn’t keeping up with the increasing prices of goods, diminishing my purchasing power. Investing in the S&P 500 ten years ago would have nearly tripled my money, easily outpacing inflation (so long as the investment was held through numerous pullbacks).
I just have to remember that and during days like this to…
Thank You!
If you’ve made it this far, then you are an amazing human. Let me know what you think by leaving a comment. Or drop me a question. Share it with others who you think might appreciate the information. Looking forward to sending out the next issue!
**I am not a financial advisor, so please don't buy/sell anything based solely on what you read here and do your own due diligence.