Sailing through the financial storm
“It is the set of the sails, not the direction of the wind that determines which way we will go.”
— Jim Rohn
Sailing is an interesting study of physics. A novice would suppose that the best way to sail would be to position yourself with the wind to your back and let the wind drive directly into the sail driving you forward. Basically, “Let’s set sail and see what happens.”
Many investors and advisors alike set sail in the 1980s with the wind to their backs without a cloud in the sky until year 2000. They entered the perfect storm, and woke up broken, disoriented and scared. A nautical expert understands that there are many forces to be managed and can navigate through seemingly impossible circumstances. An experienced sailor is not simply driven by the wind, but understands that the wind is a power to be harnessed and can even be used by that captain to sail directly into, and at the same speed as, that very same wind blowing into his face.
It is imperative when sailing through rough financial waters, that the investor recognizes that his financial boat is not meant to simply be tossed around on the waves of the stock market. The stock market is indeed a tool like the wind that must be harnessed by an investor with understanding.
Many of you may have heard the rumblings of a storm coming in. Maybe you have been watching the clouds of Europe roll in, or maybe you heard the crash of thunder from last Friday’s disappointing employment report. Maybe you have already made the appropriate changes, or maybe you are just scared to death. Here is my Survival Guide for Navigating the Current Financial Storm. It is certainly not exhaustive, but can serve as a compass as you consider battening down the hatches in choppy markets.
Understand your investment strategy. There are basically two types of investment strategies —passive and active. Passive investing is a form of buy and hold with few changes over a long period of time. No gains are locked in until an asset is sold, usually because money is needed from the account. Active investing seeks to buy low and sell high. Investments may be sold simply to capture a gain or manage a loss, and not necessarily because money is needed for withdrawal.
Passive Investors: As I have mentioned in articles past, managing risk is the first order of business. The first step is to be sure that your holdings are well diversified over many asset classes or sectors. Once this basic step is done, it is essential to know the level of risk that your account is exposed. This can be evaluated using a financial statistic known as beta. Beta simply measures the risk of your investments as compared to a benchmark such as the S&P 500. A beta of 1 would mean that your account has equal risk to, and will feel all the movement of, the S&P 500. A beta of .5 would mean that your portfolio holds only half the risk of the S&P 500. During choppy markets like we are experiencing now, a beta between .5 and .8 would help dampen the blow from a market downturn. Your financial planner can provide you the beta for your portfolio or you can use a quick Google search for “portfolio beta calculator” to find instructions or tools to accomplish this. If you are risk adverse, you might consider making portfolio changes to bring your beta into this range by adding alternative investments such as currencies or commodities.
Active Investors: Diversification will greatly impact your risk as well. This is a good time to consider taking some profits from positive trades and tightening your stops on all trades. Another option to consider is lowering your investment dollars per trade to allow your positions more wiggle room to work. Invest in holdings that do not move in lock step with the market, but are driven by a completely different set of factors.
Reality Check: The stock market is now at the same levels we experienced around year 2000. That means a passive investor directly invested in the stock market would have risked money through a terrorist attack, a financial crisis, a housing crisis, a recession and now a European crisis for 0 percent return. Today’s investor must not rely solely on the stock market to passively provide a gain. One must expertly navigate to get positive traction in a choppy market.
Real Advice for Real People: Like an experienced captain, you must recognize the financial weather and navigate accordingly. The simple buy and hold mentality with no risk management is no longer acceptable. Now is not the time to let fear keep you from opening up your account statements. Make it a point to work with or learn from a professional and tend to these areas. Following these steps will help give you the thrill of the voyage without the Gilligan’s Island experience.
RC Arseneau is a Certified Financial Planner and lives with his family in Delaware. Please submit any questions or topic requests to AskRc@mail.com.
The information and opinions in this column are provided only for educational and entertainment purposes. Any reference to a financial product or strategy is not to be considered an endorsement or recommendation. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional financial, legal or tax advice. Investment Performance may vary due to timing and expenses. Rc recommends that you obtain your own independent professional advice before making any decision in relation to your particular requirements or circumstances.