We talk a lot about ensuring you have a resilient investment plan that’s suitable for you. If you’ve been putting off writing that plan you might now be a bit shaken by recent market moves. But it is not too late to act.
Here are our 10 vital steps to guide you through unfolding events. If you already have your plan in place (well done!) then this is a good opportunity to make sure it’s water-tight (or as water-tight as possible).
If not, our strong recommendation is that after you have gone through these, you write down what you are doing, and why – it will result in a clearer plan, and clean out any woolly thinking.
Let’s get started.
1. You must accept the possibility that markets can go down further (and for longer) than fits with your life plans.
You must start with this important mental adjustment. You do not need to know when
this might happen or why
– just accept the possibility.
(See the Dangerous Myth
You must allow for risks without precedent which, if they occur, might destroy your life plans.
Once you have acknowledged this, the following steps are much easier.
2. Decide IMMEDIATELY whether your attitude to investment risk has changed.
Most self-directed investors do not address the issue of risk very well. Partly this is because a 40-year bull market has made investors (and the investment industry itself) complacent about risk.
When I refer to “risk” here I mean the ups and downs of your fund values – strictly speaking what we should call volatility.
The problem in the current environment is that “risk” punches you on the nose! I am confident you are now paying attention, perhaps in a way which you never have beforehand. When you are confronted with some new facts or shock, as is the case now, this is a rude wake-up call, and one which should be taken seriously.
If your attitude to risk has changed, you must now seriously address the following steps, which will add much greater clarity to your investing, and definitely reduce stress.
3. You must have a plan to deal with your investments falling.
Here’s why. Imagine there is some unexpected news, such as we’re seeing with the coronavirus outbreak. The value of your £100,000 portfolio falls to £70,000, down 30%. You do nothing. It recovers a bit, and then falls again, now down 50%. It recovers a bit over a few months, then down again, now over 60%. This pattern repeats. It repeats over a number of years – remember the Japan Problem. Their stock market has been down for nearly 30 years. It suffered falls of 80%+ at worst, and is still down nearly 50% - after 30 years!
But you do nothing.
How would you feel? For you this money, or very possibly a much bigger sum, might represent a lifetime of carefully accumulated wealth, for which you worked bloody hard.
How would you feel? How would it impact your life plans, such as your income through retirement?
If this is a shock you would rather not experience, you need a plan with some very specific action points. Let’s look at those now.
4. Reduce the number of your investments (whether funds or individual stocks).
A maximum of 15, but as low as possible. The more holdings you have, the harder you will find it to take action in a crisis. This next test will help you with this task… (see the blog for more
5. Apply “The Overnight Test”, simple but powerful.
Assume someone sold all of your investments tonight without your knowledge, and tomorrow you woke up with 100% in cash. Here's the test...
You can re-purchase the same investments at no cost. Which would you re-purchase? What changes would you make?
Now ask yourself the question why aren't you making those changes now?
Go practice some selling now. Practice makes perfect.
(See more here
6. No fund holding should have a value less than 5% of your total portfolio value.
If the value of any one fund is less than 5% of your total portfolio, it is highly unlikely to have much impact on the progress of your portfolio as a whole – so have a smaller number of fund holdings, of greater value.
7. Once extreme valuations and behaviour are evident, begin to increase cash levels.
If you are following our “best practice”, you should have been doing this already. (See more here)
8. Have a clear stop-loss strategy and make sure you apply it.
With a stop-loss you literally stop your loss from getting bigger.
For each investment, decide how far the value must fall to trigger you selling it. For example, is it 10% or 5% or 15%? We have researched this in detail, and crunched numbers over four decades. There is no perfect answer, but an effective level appears to be 10%.
Selling when values fall 5% means you continually get whip-sawed in and out of markets. In contrast, if you set the level at 15-20% or higher, you are much less likely to act on the stop-loss trigger, because the loss is too painful. 10% works well.
Write this down for each
investment (fund or stock). Do this in a moment of relative calm. This is pre-commitment
and makes it more likely you will act when the time comes. (Read more about stop-losses here
9. Have a plan to buy, too.
If you follow the above steps there will be a point when you have cash burning a hole in your pocket.
Buying sounds easy, but the best opportunities will be when there is maximum fear – which means it will feel very uncomfortable buying at that time.
We have a number of useful indicators to help identify such times to buy, and strategies so that it will feel less uncomfortable. It will be a regular feature in our Friday emails and monthly teleconferences in coming months.
10. Pay attention!
Even for the most disciplined of us, that is not easy day after day – after all, you have a life! So, take advantage of what FundExpert has to offer. Make sure you have set up Stop-Loss Alerts for your funds (see here
) and also your 6-monthly review reminders (see here
Without some kind of community DIY investing can feel quite lonely, especially when the going gets tough, and most investors make bad decisions under stress. Make sure you’ve joined the Facebook group
where you can post questions and discuss things with other Gold Members.
And do make sure you tune in to the monthly teleconferences. Send in your questions ahead of time so we can include them on the day. And if you can’t tune in on the day then do listen to the recording. The full archive is here
. We include timestamps for the key sections and links off to other resources.