Advance to Go

When bad markets happen to good people, they, much as our prehistoric ancestors did, see their cortisol levels rise and stress levels increase, and they start actively thinking of ways to make it stop.

Unfortunately, the market doesn't care.

It will continue to do whatever it is doing, regardless of how much worry or fear we have. So when the prices start falling, and the value of your portfolio starts to decrease, don’t panic. Take it as a good time to ask yourself a few questions.

For the unprepared, the question is usually, ‘what should I do?’ 

Should I sell everything, take my losses, go to cash, hunker down and wait out the storm? 

Or, should I show no fear and start buying at these great sale prices? After all, how far down can it go? 

If you hear these questions rolling around in your own head, the best thing to do is to stop thinking about the market and start thinking about your approach to investing:

Are you a speculator or an investor?

Imagine that you're playing Monopoly. Your favourite game piece (is it the sports car?) is sitting at the start. You've been playing for awhile, so hotels and houses are littered along the properties, the railroads and utilities are all bought up, you've got $500, and you haven't hit Free Parking the whole game. You feel a bit as though you're walking through a minefield.

Your answers to the following questions will determine if you get around the board or not. 

First question: Do you have a plan?

Think for a bit, and remember that before you invested the money, you had reviewed your objectives for the funds and decided that a portfolio using a balanced strategy would be best, given your feelings towards risk and volatility. Excellent response, move ahead ten spaces and hit the corner where you're just visiting jail - a safe haven when you're surrounded by everyone else's hotels. 

Second question: The words ‘balanced portfolio’, what does it mean to you?

It can mean different things to different people. To some, it will mean taking some risky investments and some not so risky investments. If this is all you know about the way your portfolio is set up, move ahead five spaces to the Pennsylvania Railroad and pay the owner $200, because he owns all four. 

If your response is, “I have a combination of different asset classes that are uncorrelated - bonds, stocks, and cash - so when things change in the market, all my investments aren't going in the exact same direction,” then move ahead six spaces, park your racing car on St. James Avenue, and breathe a sigh of relief - you own it.

Third question: Have you been rebalancing your portfolio every quarter so that it is diversified in the same way as you originally set it up to be?

If your response is something like, “What’s rebalancing, the only thing I rebalance is my tires,” move ahead six more spaces and put your token down on Chance and pick up a card. It reads, ‘You are assessed for house repairs: $40 per house and $115 per hotel’. The good news is, you don't have many. The bad news is, it still cost you $240. That means you have $60 left. 

If on the other hand your answer was, “Of course. Every quarter I rebalance my portfolio to its original weightings,” move your car two spaces ahead to Free Parking and pick up all the money in the middle - good job.

Fourth question: Do you regularly review your investments with your advisor to make sure that everything is on track?

If you said, "What advisor?” or, “That isn't part of what we do,” move ahead eight spaces, and place your token on Go to Jail. Take the ride into jail, and wait to do it all over again. 

If you said, “Yes, we meet regularly to review the portfolio and discuss changes that may be appropriate,” move your snappy little car ahead two spaces and land on Chance. Pick up a card and read it out loud, ‘Advance to Go, collect $200’.

And there you have it, a quick primer on portfolio management. For those of you not counting, the wrong answers left you with $60 and three turns in jail. 

The right answers left you the $500 you started with, plus $500 from Free Parking, and an additional $200 for passing Go. All in all, a good turn. 

The key to successfully managing volatile markets isn’t about gut instinct or luck, and it’s not about reacting to whatever’s going on that week. It’s about knowing why you’ve made the decisions you made, creating a plan that guides you through the bad times, and finally, sticking to it, regardless of what your friends are saying.

This article is written by or on behalf of an outsourced columnist and does not necessarily reflect the views of Castanet.