Although the recent events were not (yet) a crash, rather a correction of about -12pct, it is weird to see what all the side action. This is the first real correction that I observe from close by. The past corrections or crashes, I was not into personal finance as I am today. I was therefore curious to see how it would impact me.
One of the things I noticed is that I stayed calm. This came as a surprise to me. I managed to sleep, I was not blaming myself or the Chinese or the capitalists. This was a pleasant surprise. The question is, how come?
Understanding long term investing
I believe it helps to understand that investing is for the long term. I am convinced that with a long enough time horizon, you have a very very good change to succeed. The studies that I read show it all. Invest for a long enough time frame in a well diversified stock portfolio, and you can expect a positive return, but it will be a bumpy road. A good place to read about this yourself is the intelligent asset allocator book.
I am in my accumulation phase right now and my time horizon is at least 15 years until FIRE. This should be a enough time to have positive results, if I can stay calm when it gets bumpy.
By coincidence, I prepared an article in July on what the effect of a correction could be and how to accept it when investing for the long term. There are some principles and best practices you need to put in place to be prepared. In a certain way, I prepared myself. Let’s call this the perks of blogging!
Benefit from the community
On of the things that actually helped is to read what others have to say. Of course, I do not mean reading the horror stories from the mainstream press, but I refer to reading blogs from people that believe the same as I do: investing is for the long term, so have a plan and stick to it. It was really helpful to read the same message over and over again. It added to my calmness. It puts events in perspective. It gives ideas on what to do if the correction becomes a crash.
What have I done?
As far as I look at it, being in the accumulation defines your ideal situation: Try to buy as many assets as possible with your investments. It is clear that a market crash is than better than all time highs. In an ideal world, you can invest more money when the stocks are low. There is one but: I do not believe in market timing. I have no idea what will happen tomorrow or the day after. I believe that therefore regular investing is the right thing to do.
- Invest less than normal to build up cash
Yet, in July I decided to adjust: I would invest less than normal. The rest of the money will be parked for deployment after a crash. I know, I know, it smells a lot like market timing. But to me personally, it makes sense
I still invest each month, so for the majority of the money, I do not time the market. Let’s say that 75 pct is invested each month.
The principle should only be applied if the markets trade well above the long term valuations. For that, I look at P/E of certain markets. I agree it does not predict a market crash, but it indicates I start to pay a lot for the assets I buy. At that time, I build up cash in order to benefit from a real crash.
The money can only be deployed if there is a real crash and the valuations are below the long term averages. This means that in the current situation (written on Aug 28) the money needs to be parked.
If the markets seem to be in line with the long term averages, I just buy each month with all I have that month.
Will this work? I do not know. It all depends how long it will take before we reach these real low valuations again. It can be next month or 5 years from now.
- The need for cash
Due to the sudden drop, I also started to think in terms of cash flow. How can I avoid to sell in case of an even bigger drop? Of course, We do have our emergency fund. And there are other things to take into account. Like holiday plans with the kids. How Are these bases covered? To be honest, today, they are not covered enough. But we have time: part is in guaranteed products. That should cover the first trip.
Defining a plan and approach for that is something for the 2016 goals.
Did you adjust your plan to the recent events?