Finance Give yourself a cooling-off period It might sound trite, but often the best thing that you can do as you come out of difficult times is to do nothing − at least for a time. By giving yourself a cooling-off period, you give yourself the ability to approach important financial decisions with a clearer, more objective mind. How long should your financial “time out” be? That depends on a lot of things − your financial means, your personal risk tolerance and, of course, howmentally ready you feel about getting down to the task of rehabilitating your portfolio. A good rule is at least several weeks. That will give you enough time to create some emotional distance between what’s happened and what needs to be done, and will give the market volatility a little time to calm down (at least to some extent). Acknowledge the new reality One of the most dangerous mental traps after going through a bear market is anchoring on the past: assuming that everything will go back to the way it was before the crisis. The most obvious example of this is hanging on to losing positions long after the business fundamentals of an investment have changed. Instead of taking a loss andmoving on, investors wish, hope and pray that the position will “come back.” Sure, sometimes a loser does come back. But more often, losing positions stay losing positions. And even if it does come back, it often takes an inordinate amount of time − time that could have been used to seek out and put our money into superior investments. The pros call this “opportunity cost”: the loss of potential gains from other opportunities which we passed up because we hung on to our losers for too long. Does this mean that you should scrap everything and start over? Probably not. But whatever action you do have to take, it’s almost always better to acknowledge the new reality we’re living in, admit our mistakes and get on with the healing process, rather than waiting for things to magically get better by themselves. Focus on the “why” In the middle of a financial crisis, it’s easy to forget about the reasons why you hold a particular asset, or why you invested in a particular theme or industry or geographic market. And that’s understandable: when you’re hurt, your focus is on trying to stop the bleeding (whether literal or financial). All else is secondary. After the immediate danger has passed, however, we need to shift out of this reactive mode and, instead, turn our minds to the “why” of our portfolios: why are we investing? What are our long-term goals? How does each of our holdings help us accomplish those goals? What can we do today to bring us closer to achieving those goals? These are bigger-picture ideas which force us to put aside the day-to-day price fluctuations and trading decisions and think instead about bigger ideas. No, it’s not easy to answer these questions, but the process of thinking “big” will put you in a better position to make informed, strategic decisions about your portfolio, rather than making it up as you go along. Stop thinking crisis, start thinking opportunity OK, we know that you’ve heard this one before. And by now, it can almost seem like Wall Street propaganda to suggest focusing on the silver lining behind stock market carnage. However, the fact remains that this mindset – be greedy when others are fearful – has been the hallmark of some of the most successful investors that the world has ever known. If you don’t yet have a “watch list” of potential investments which you’d like to own if the price is right, take some time to get one together now. Take a look at severely beaten-up businesses that present excellent longterm opportunity. Think about your existing holdings: are there positions to which you’d like to add; where are other investors getting “silly”; are there specific stocks, industries or indeed entire asset classes that have been severely oversold? Remember: it’s been about a decade since the market has had a “sale” like this. Years fromnow, we’re likely to reflect on how now was a great time to “stock up” on investments that had been far too expensive prior to this. First, heal your mind... Fact: a bear market is a very emotional experience. That’s doubly true for those of us who rely at least in part on our investment portfolios for our income (as many snowbirds do). Even if you’ve taken no actions, or done nothing “wrong” with your finances over the past several months, you may well have seen your income stream (and, by extension, your ability to fund your quality of life) drop significantly. That’s a tough pill to swallow. That’s why before you start the process of healing your portfolio, it’s a good idea to heal your mindset first, so that you can think straight about the decisions and actions which need to be taken in the weeks and months ahead. Here are some ideas: 28 | www.snowbirds.org
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