“It's only when the tide goes out that you learn who's been swimming naked.”
Imagine you are sailing from San Francisco, California to Sydney, Australia. About a quarter of the way there, you hit massive waves. What do you do? Your only two options are:
A) hunker down, prepare for the tides and remain optimistic; or
B) try to turn around and head back to San Francisco
Choosing (A) means that you have a plan. In (B), you most likely panicked and will incur even more damage by trying to turn around in the middle of a wave.
As I previously described in “FOMO Investing”, the market inevitably has its own waves - financial crisis or not - people end up focusing on predicting waves rather than figuring how to ride them over a long period of time. When things are headed up, it’s too late to catch the train. When things are going down, it’s too late to sell and they waive the white flag and retreat. Why play that game? Did you create a plan to reach Sydney that you were confident in? Do you actually want to go to Sydney or are you trying to just catch a wave and go somewhere else? When planning your journey, do you plan for waves and have the mindset to hunker down or just go with the flow and retreat at the first bump?
Those who know me know I love using analogies but enough of that, let’s cut to the chase and discuss a game plan for dealing with a financial crisis.
My four key principles for investing are:
Determine your ethical principles and stick with them;
Keep it simple and stick to what you know;
Think in the long term rather than short term;
Don’t get caught working for your money, let it work for you.
These simple principles will help you weather the storm and make the most of a bad financial crash. Some additional tips include...
Reevaluate your budget
This is an excellent time to prioritize what matters to you. Determine what is most important to you (mortgage/rent, car payment, food, etc) and then add a 10-20% buffer for miscellaneous spending.
Reestablish your rainy day fund
Always maintain 6-12 months of your budget in cash.
The more prepared you are for a rainy day, the better investment decisions you can make. You will have a free conscious and further prevent yourself from being forced or squeezed into a position.
Automate your financial health
I split my direct deposit paycheck into two checking accounts: one for my monthly budget and one for the remainder. All of my credit cards and expenses are paid from the monthly budget account. Every month, rain or shine, I automatically invest in a basket of stocks primarily backed by the QQQ index from the remainder account. This plan changes occasionally but the fundamental idea stays the same. Having a plan does not mean it's unchangeable - tweaks are normal and required over time.
Investing in indexes ensures no extra action needs to be taken to invest. It allows your plan to run on autopilot and prevents you from making emotional decisions.
No one can time the market. If someone would have said the market is right back to where it was before the crisis, you would call them crazy. Do I think that the market will take another dip? Yes. Do I think that I can time the market and buy at the dip? No.
Some argue that indexes don’t give them an edge in the market. It is well established that active money managers perform worse than the market over time. Being patient and thinking truly long term gives you a true edge.
My portfolio is thematically focused on technology. While I am sure there will be bumps in the short term, I can safely predict that technology will play a larger role in the economy and our lives over the long term. In my next post, I will be making my portfolio public and sharing details on it.
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