The way to invest in times of the coronavirus is the same way you invest when we don’t have a coronavirus.
You buy and hold.
We should highlight that there is a difference between being an investor and being a trader.
How traders take advantage of current market movements
A trader buys or sells on a short term basis. For a trader, one of the best things that could happen is to have high volatility.
To be a trader, all you need are two rules
- You need the rule to tell you when to buy
- You need the rule to tell you when to sell
Notice that successful traders do trades based on established rules. They should not make trades based on emotions. Hope, fear, and greed will always get the best out of you.
A trader can do great in volatile markets because a trader can short sell the market, or can buy. Traders can make money regardless of the directions of the market.
The problem for many traders is that they don’t adhere to strict rules. They get swayed by what’s happening in the news, by commentaries, by stock shows.
When traders buy based on news, they buy when a stock becomes popular (i.g. when it’s too late) and sell when the stock becomes unpopular (again, when it’s too late).
Buying and selling on the news is great to have a topic of conversation at cocktail parties and/or to have a sense of belonging, but it’s not a great activity for one’s portfolio.
How investors make money in the current markets
Investors buy assets with a long term vision, with the hope of selling far into the future when the funds become necessary to finance their retirement.
It is normals for the stock market to go up and to go down. However, the recent downturn seems odd, only because since 2009 we haven’t have any down year.
In a universe where the stock market can go up over 20% in one year, it’s only normal that the stock market can also go down 20% (or more) the following year. And that’s the normal cycle of the market. The market goes up, and the market goes down.
In fact, from a pragmatic’s point of view, when the market goes up 11 years in a row, that’s not normal, and that makes me feel nervous. When the market drops from time to time, I see it as a normal part of the game and I feel more comfortable.
Here is my investment strategy
I make my investment plans based on my life expectancy. Not on a theoretical retirement date.
Many financial advisers continue talking about a “retirement day”. Retirement is a fuzzy term. Many people retire early, many people don’t want to retire, many people go in and out of retirement, many people continue working part-time. Don’t use “retirement day” for your calculations, use life expectancy and make your investment decisions based on that number.
In my case, I am 52 years old. I am planning to die at age 100. This means that I have to plan to have my money invested for the next 48 years. If I think about it in this way, one year or even several years of a market decline should be part of the plan. A market decline should not be the reason to get out.
What kind of investments do I hold?
I have written about this many times. I buy a broad-based index ETFs (Exchange Traded Funds). I buy
1/3 Canadain index
1/3 U.S. index, and
1/3 international index.
I don’t buy bonds.
I don’t rebalance after each year.
Each year, I put all my new money (The TFSA limit) into the holding that has the lowest monetary value. I only do one transaction per year. That’s all. I buy and I hold.
Has the coronavirus made me re-evaluate my investment strategy?
Yes, I have come to realize the importance of cash.
Before the coronavirus, I had planned to have a three-month emergency fund. Luckily, I have a little bit more than that.
Whenever we go back to normal, I will start working towards having a one-year emergency fund. We never know where the next crisis will come and how long it will last. I am willing to accept the opportunity cost of having one year’s worth of cash.
Related Posts
- Our elder population is dying of Loneliness too
- The 4% rule under test by the Coronavirus
- What if you never save for retirement?
Connect with me
I would love it if you connect with me via social. You can find me on Facebook, Twitter, LinkedIn, YouTube and Instagram.