The best solution to the current problems in the financial markets
For every situation is a solution
A friend called me yesterday, and I haven’t spoken to him in over half a year.
“Hello, how are you, is everything okay?” He asked me in a tone from which I immediately realized that in fact HE was not okay at all.
“What do you think of these problems in the financial markets? Do you have any idea how long it might take?” He continued.
Obviously my first reflex was to tell her that the number was wrong and that she should have called Mother Omida… :-)
But I refrained because I understood his frustration.
After a pretty good start to the year, the BET index of the Bucharest Stock Exchange lost about 20% in just a few days.
And the S&P 500 index, the largest stock market index in the US, fell at one point by 15%.
For my friend, who started investing in stocks only a few months ago, the current stock market correction not only canceled out all his earnings, but even ruined his portfolio.
And now he faces a dilemma:
- on the one hand, it would like to buy more shares in order to benefit from the lower prices at the moment;
- on the other hand, he is afraid that these decreases could only be the beginning of an even bigger collapse, in which case he would like to wait to buy at even lower prices.
Like any investor, my friend oscillates between 2 fears:
- fear of missing a possible opportunity;
- Fear of even greater losses.
The worst of all decisions he could make would be to let himself be overwhelmed by any of these fears!
1. Because these declines could stop soon, and be followed by a quick comeback.
Just like it happened in December 2018, August 2015, August 2011 and June 2010.
Cases in which the accumulation of shares at “discount” prices of 15–20% proved to be very profitable.
2. But there were also situations in which the corrections on the stock exchanges continued for 1–2 years and did not stop until collapses of over 50%.
As it happened in the years of the well-known crises of 2007–2009 and 2000–2002.
In those times, those who had too much exposure on the stock markets went through very stressful times and many found themselves in the situation of liquidating their portfolios with very high losses.
However, every now and then, absolutely every time, the stock prices have finally recovered, even though this return has sometimes lasted several years.
- The downside when investing in financial markets is that you never know what tomorrow will bring.
Will it be a good day, with profits, or on the contrary, a day with decreases?
- The good part is that when you invest in the long term — at least 10 years — it doesn’t matter!
All that matters is having a long-term plan and building a diverse portfolio.
Here’s an example of such a diversified portfolio (just an example, not an investment tip):
- 30% shares (S&P 500 index);
- 30% real estate (through REIT type investment funds);
- 30% US government bonds (lasting 7–10 years);
- 10% gold (through a gold ETF).
Such a portfolio brought in January. 1994 — ian. 2022 an average annual yield of 8.7% per year (in dollars).
Even more interesting is the fact that in the worst year, 2008, in which both shares and real estate fell, this portfolio had a decrease of only 17.7%.
The most important thing is that the investment plan you make must represent you as well as possible, so that it fits your risk profile.
And it must be realistic, that is, take into account both the historical increases in stock prices and their inevitable corrections.
And when you implement this plan consistently, month by month and year by year, it will automatically lead you to success.
With all the volatility of the moment, with increases and decreases, bigger or smaller, with all the problems that appear in the financial markets.
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