As the Coronavirus wreaks havoc on the population and global markets, it’s the perfect time to evaluate how you assess risk in your life. It’s easy to say, “expect the unexpected,” but it’s not always easy to put it into practice. Nonetheless, preparing yourself for the worst-case scenario is one of the best things you can do for your financial future.
My investment experience
Around 2006, I started taking an increased interest in the stock market. My father always recounted losing a lot of money in the 1987 crash, so I had been wary about investing. Despite this ingrained anxiety, I endeavored to open a portfolio and put my money to work.
At first, everything was great. I found a few companies that interested me personally and showed promise financially. Every time I opened my stocks app, I would excitedly read about the latest news related to my investments and the market at large.
Then, after about two years of moderate success, the unexpected happened (at least it was unexpected for me). The housing market collapsed, taking the rest of the stock market with it. In just a few weeks, I not only lost my gains, but I also lost a good portion of my initial investments.
The 2008 market crash marked a low point in my financial life. As it turned out, the fears instilled in me by my father had largely been correct. I ignored the little voice of doubt in the back of my head and it almost cost me my life savings.
My advice to new investors
All of this is to say that you should always expect the unexpected before you invest. Between events like the 2008 crash and the current uncertainty surrounding the Coronavirus, there’s no time like the present to start preparing for what’s to come. Here are just a few ways that you can get ahead of economic downturns:
Assess the markets thoroughly
New investors tend to dive in headfirst (like I did). They might do a little bit of research, but generally, new investors start buying stocks or bonds before knowing what it means to “get the feet wet”. This is a huge mistake, as my story illustrates.
Before you ever pull the trigger with any investment, you need to do plenty of research. This doesn’t mean that you should spend an afternoon learning investment jargon. It means that you should take a few weeks (at the very least) to track the market, track investments that you’re interested in, and study different ways to grow your wealth in the stock market. The best way to assess the market, learn first-hand, and create and test a trading strategy is through a paper trading account. This is a virtual trading account that allows a would-be-investor to practice buying and selling trades without risking a cent!
Don’t dump all your savings in one place
You’ve probably heard the term “diversification” or “asset-allocation” a lot in relation to investing. Spreading your investments out is one of the best ways to mitigate risk and ensure long-term gains. For example, if you put all of your savings in one stock and it tanks, you’ve lost everything. On the other hand, if you spread your money out over dozens of stocks, bonds, and ETFs, the chances of losing everything are very small. Your asset allocation will change over time depending on your age and how close you are to retirement.
When you’re first getting started, you shouldn’t risk all your savings, whether it’s diversified or not. Instead, start slowly with a portion of your savings. Spread it out over a few different options and see how they develop. If you see that things are going well, move some more of your savings into investments. The key is to take things slow and diversify along the way so that you can minimize risk while you’re learning the ropes.
There’s no right answer on how to specifically divvy up investments as it’s situationally dependent. As you and your investments grow older, your tolerance for risk will change with the times.
Don’t treat investing like a one-person operation
Most people don’t like to talk about how they invest their money. Finances, in general, are treated as a taboo subject. While everyone has their own comfort zones regarding money, you shouldn’t be afraid to ask advice from your peers, family, and anyone whose financial advice you trust.
It’s not always easy or seemingly economical to speak to a financial advisor, but garnering advice from different sources can help you gain new invaluable insight into your investments. Perhaps you were considering investing in a new company, only until you were informed that they will likely not turn a profit for a few years. Naturally, you shouldn’t take everyone’s advice or opinions at face value, but you should carefully consider the risk vs return when you decide where to invest your money.
Expect the unexpected
If the Coronavirus has taught us anything, it’s to expect the unexpected. Even if some could have predicted the current pandemic sweeping the globe, many of us would have ignored the signs. It’s easy in times of financial gains to become comfortable that uptrends will remain constant and stable for the foreseeable future. However, as an investor, you must always be ready for the worst-case scenario. After 11 years, investors were forced to say goodbye to the longest running bull market in history.
This doesn’t mean that you should hide all your money under the mattress and become a financial recluse. It just means that the world is an unpredictable place, so you should always be cautious with your money. If you assume that the markets will always keep growing, you’ll set yourself up for a disaster down the road.
In order to expect the unexpected before you invest, you must strike a healthy balance between growth and risk-mitigation. Everyone’s financial needs are different, but I like to go with an 80-15-5 model. 80% of my investments are put into low-risk bonds, ETFs, or mutual funds. Generally, I try to find investment opportunities that yield growth steadily over time and provide regular dividend payouts.
The next 15% of my investments go into medium risk stocks and ETFs. These usually promise greater growth potential, but they also invite greater risk. Finally, the last 5% goes toward medium-to-high risk stocks that offer even greater growth potential and possibly even more risk. These are what I call “experimental stocks.” You invest in them in the hopes of winning big, with the understanding that you could also lose some or all of your initial investment.
You might think that this is an overly conservative investment model. This model has seen me through some tough times (I wish I had used this approach in 2008) and it has helped my portfolio survive and even thrive through financial downturns. However, everyone’s financial needs and goals are a little different. Ultimately, you will need to find a formula that works for you.
No matter how you choose to proceed, always remember to expect the unexpected!
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
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