Near Miss
The near miss reported today,
is the accident that doesn’t happen tomorrow.— Unknown
A close encounter with a shark prompted the creation of the independent short film Near Miss, which won a litany of indie film awards in 2019. It chronicled the exploits of a diver who, having over 400 encounters with great white sharks in the course of his job, was eventually bitten by one, and lived to tell the tale.
Wikipedia describes a near miss as an unplanned event that has the potential to cause, but does not actually result in, injury or damage. In investing parlance, 2020 could be considered a near miss. Markets plunged dramatically in the early part of the year, but was subsequently followed up by the fastest recovery on record. This is akin to having a great white shark barrel towards you head-on, only for it to veer away at the last minute, perhaps brushing you with its tail.
If you have made it through periods of volatility like 2020, but felt extremely scared at the moment, it is wise to consider the following points:
1. Start an emergency fund
Having such a liquid fund at your disposal can be very valuable, especially since you won’t know if you may be laid off during a future crisis. These savings will help to tide you over as you seek a new career. The fund will also ensure that you hold onto your investments and do not sell at the worst possible timing if you require money to fund your expenses.
2. Ensure that your portfolio allocation is correct
If you logged on nervously to your investment account and felt your stomach churn upon seeing the red numbers in March 2020, then it is likely that you are invested in the wrong type of portfolio. You should review that your asset allocation is right for you, allowing you to sleep at night, while at the same time, in line with the timeline of your goals.
3. Have some buffer in your cashflow
It is not helpful if you earn $5,000 but use up $4,999 every month, especially if a lot of expenses are fixed costs such as mortgages or other loans. Having some buffer will give you more peace of mind in the future if the economy, your investments, and jobs in general take a nose-dive.
Besides being panic-inducing, another downside of near misses is that it can conversely cause delusions of invincibility. Imagine the scenario of narrowly avoiding car-crash on the expressway, being saved by your quick reaction-time which enabled you to swerve at the very last moment. You may inaccurately assess yourself to possess the reflexes of a Formula 1 driver, when it only essentially boiled down to chance. The same thing can happen during investing - where you could mistakenly assume that it was your information or prowess which other investors did not possess, that allowed you to avoid the catastrophe. This can come back to bite you later on.
Building a systematic process into your investments will help you get past these behavioural biases. Be aware that market volatility often happens independently from each other. The reasons for market sell-offs lurch from trade war fears, oil price collapses, European financial crises, and COVID-19. 2021 and beyond will bring new events into play. Make sure that your portfolios are robust to withstand such future shocks by rebalancing when your allocations are out. Check to see where the weak points in your investment strategy are - did all your ELNs and Fixed Coupon Notes get ‘put’ when the market collapsed? Are you comfortable holding individual securities of these companies? If not, then you should plan to hold other instruments.
Seeking proper financial advice or a second opinion from an independent third-party or fiduciary advisor like GYC can help you think clearly and make smart decisions after a near miss. Such an advisor can help you to build an investment plan which is congruent with your goals, and able to withstand future volatility and other near misses.
