Financial Fire Drill: Be Prepared
March 22, 2021
One the most significant risks of investing is letting your emotions push you into panic selling. That unfortunately happens and can be financially harmful.
Another risk we face in life is fire. For that we may be prepared because of practicing a fire drill.
A few simple rules to follow. Do not panic. Have a working fire extinguisher available, know how to use it and potentially exit the building.
The importance of being prepared can also be useful in managing your investments.
What type of “fire drill” procedures should be in place in case suddenly stock market values start to plummet and so does your portfolio?
Here are a few suggestions.
Start by managing your expectations. For example, looking at the US stock market over close to 100 years we see a pattern.
Markets suffer an annual decline about 25 per cent of the time. So about one out of every four years you should expect to lose.
Occasionally the stock market has suffered back-to-back declining years. That said, there has never been a market decline that has not fully recovered and gone on to post new record highs.
Having a well-balanced and diversified investment portfolio is key. Specific companies might falter or go out of business. Owning just a few companies can be risky.
Focus on your long-term goal. Preparing for a retirement that will last many decades should not be negatively impacted because you have a few bad years of investment returns.
Those bad years caused by declining stock values should be considered as normal investment risk. Assuming that risk allows you the potential of achieving higher returns by owning stocks than by owning less risky bonds.
A suggestion. Write out your own investment “fire drill”.
It is unlikely you will suffer a real fire during your life. It is almost a certainty you will suffer one or more times of significant stock market losses.
Peter Watson is registered with Aligned Capital Partners Inc. (ACPI) to provide investment advice. Investment products are provided by ACPI. ACPI is a member of the Investment Industry Regulatory Organization of Canada. The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Watson Investments.