Market declines were not about willpower NOT to sell, but rather an opportunity to reassess value.
In down markets there will be companies on sale. Not all of them, but a few.
All those mutual fund/index fund investments also go just a smidge further in a down market, too, buying more shares with each dollar invested. The other game I played was to track the number of shares owned. Philip Morris might be down, but I still own my pro-rata share of the company. That part is mine. My part of the revenue; my part of the assets; my part of the profits; my part of the dividends.
Strangely, the dividend stream never dipped much so I changed my game as the account values increases to add new money to maintain the income stream only.
Isn’t money a fun game?
Market Timing
Smart people will tell you to never try timing the market. I think I’m a relatively smart guy! It could be delusion, but it’s my fantasy so I’m sticking with it.
In late January I mentioned on social media (Facebook) that I moved to my highest cash position in my adult life. I was promptly jumped for market timing. A few days later we had the current market pullback.
So what gives, Sir Accountant?
Well, in my defense, I wasn’t timing the market. My gains over the last decade have been nothing short of astounding. Second, when I calculated the discounted future value of earnings with higher interest rates due to the tax law changes the numbers no longer added up.
I had no idea my selling would be so well timed. But . . .
My timing wasn’t timing! And even if I was so lucky to time the market so right I still need to pick the right time to jump back in!
For the record, I didn’t sell with the intention of buying back at a lower price.
I sold because the value of future earnings were not high enough to keep eight figures and over 80% of my net worth in index funds and individual stocks.
Since the market DID decline I might return some of the money from where it came. A 5% decline isn’t enough to change my mind. Now if we see blood flowing in the streets I might bite. It’ll take at least a 20% decline to accomplish that. I’m not holding my breath.
I hope this ends all discussion of my mighty stocks timing skills which I don’t possess.
What to do and Where To
So what should you do in volatile markets?
First, DON’T PANIC!!!
The broad markets have always come back and always will. If I’m wrong there will not be earth to live on so it will not matter. You’ll have to sue me after the collapse of civilization if I’m wrong.
If you are a millennial and your account is small enough, try playing my game. Cut every possible expense and add to your regular investments until your account value has little or no change.
If your account is getting bigger play the first game with an eye toward keeping the dividend stream pointing north. This is easy so far as dividends are rising nicely as I write.
I sometimes tell people not to look at their investments when the market falls, but I am assuming there are no adults in the room. I recommend you know exactly where you stand so you can make intelligent decisions like adding extra to the pile while stocks are on sale. And it’s okay to have cash available for just such an event. Some crazy accountant from Nowhere, Wisconsin told me that.
The best way I know to visualize your holdings is with Personal Capital. The best part is there is no cost to open an account and kick the tires. Seeing your investments performance live can provide additional encouragement to play the games I outlined above.
Negative attitudes about declines are caustic! Willpower alone will not help you sleep at night and may actually get you to wait for further declines before selling! Playing a game with your mind to recognize value is a powerful tool.
The last thing I want to touch on is what I plan on doing with the cash balance I built in January.
There are alternative investments available for those in the know. One investment I’m testing is PeerStreet.
PeerStreet works a lot like Lending Club and Prosper but with what I consider less risk since you invest in real estate loans with at least 25% equity whereas Lending Club and Prosper are unsecured loans. Returns are comparable and if recent personal results are any indicator, PeerStreet does better.
This is only one alternative investment I’m considering. With the better part of eight figures in cash I’ll need a few more ideas. I’ll share them when I know more.
I’ll be publishing a PeerStreet review, but there are compliance issues. PeerStreet is only for accredited investors (PeerStreet has the details on their site if you follow the link above). Once PeerStreet’s compliance department grants permission I’ll share my review..
So there you have it. How to control your emotions when the world turns into a raving mad mob of Chicken Littles.
Anyone up for a friendly game?
The following article was republished with permission from Wealthy Accountant