Markets have been falling for some time now, and it’s been a while since things went this direction this hard. Perhaps you are feeling the heat and emotional turmoil from your portfolio going into the red, or maybe you’re someone who hasn’t even started investing yet: what can we do when financial markets go down? I have some thoughts on what we can do for this downturn, and for the next one, as well as the one after next.
Build a buyer’s mindset
If you’re reading this site, chances are you are relatively similar in profile to me: you’re still working towards retirement and love a good deal or two. If so, building a buyer’s mindset shouldn’t be too difficult. As people with some time away from our retirement, our priority should be to accumulate assets such that we have enough to retire on. We are buyers, and falling prices are discounts.
As buyers, we don’t need to fret when prices come down; we celebrate and go shopping! Investing is a lot easier once you overcome loss aversion, and fear is more manageable once you realise you are predominantly a buyer and not a seller for the foreseeable future.
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Build financial discipline
Talk about the words financial discipline and I think most people start to groan and think that I’m nagging about being more prudent etc.
But it can also be as simple as just setting up a recurring, automatic investment into something sensible*. Start with a few hundred dollars, and the key is that such an investment needs to be automatically deducted from your bank account because human laziness means that ad-hoc investing almost never works out. Over time, let laziness take over the job and do nothing while your portfolio grows with regular contributions. For proof this works, just look at your CPF.
Over time, build up your discipline by increasing the amounts ever so often. The amounts should increase – both in absolute terms as your income increases, and also rise in proportion of your total income.
Build a boring investment portfolio
Your automatic monthly investments should go towards building a boring, diversified portfolio. That means the oft-repeated advice of regularly putting money into things like S&P500 index over a long time horizon. It’s not going to give you great returns in the short term, and it’s like watching paint dry… which is basically the point of a boring portfolio.
Recent events should be a good reminder on how speculative investments can go very, very wrong. My personal take is this: if you are comfortable and on track for your financial goals, there is little reason to take huge risks that could potentially derail those plans. Sleep better, focus on your day job, and let compounding do its magic.
Build up your income
Speaking of your day job, the last but perhaps most important thing to do is to build up your income. There is a lot of emphasis placed on on trying to get better investment returns, but getting great returns is ultimately meaningless if your ability to invest is limited by a smaller income.
Increasing one’s income is quite personal because it depends on your circumstances and skillsets, but I think some general principles apply. Hustle at your work to get promotions and pay increments, or like many of my friends jobhop into better paying positions. Pick up side hustles to increase your earning ability, and/or start side businesses for more income streams. This is perhaps a whole topic in its own, so do subscribe to my Telegram for that.
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