Every week, I remind my newsletter readers that they can ask me anything. Christina wrote a great question a couple weeks ago. I’ve summarized it below if you want to skip ahead.
Hi Jesse, this is in response to your email that you recently sent about asking you anything! I do have a question actually.
So right now the stock market isn’t doing too hot, at least not as well as a year ago, which is around when I started to learn more about the stock market and investing.
So my situation right now is that I invested a lot back when the stock market was at a high and now that everything has dropped, I’m losing money.
My allocation goal right now 50% total stock market, 15% international, 15% small cap, 10% emerging markets, and then 10% whatever individual stocks that I’m interested in.
So my question is: I heard that now is a good time to invest for people who did invest a lot when the stock market was at a high, that way you’re “averaging down” (is that the right term??) and kind of making up the difference.
The logic behind this makes sense to me. What are your thoughts on that?
And then my main question is should I continue investing in my international, small cap, and emerging market funds even when the stock market is a little shaky? I’ve mostly been investing in the total stock market during this time because I know it’s safe, but should I continue to invest in these riskier investments? Or do I wait for the stock market to get better? Sorry for the long email! I appreciate your help.
A quick summary of Christina’s situation:
- She started investing into a globally diverse stock portfolio about 1 year ago.
- The market is down recently – and that means her portfolio has lost value since she started.
- Should she continue investing now, even while the market is down?
- And should she continue investing in international funds, despite unrest abroad?
- Was she wrong for beginning her investing when the market was near all-time highs?
Amazing questions, Christina. Let’s take them one by one.
Should Christina Continue Investing?
First, I’d ask Christina…how do you feel? How do you feel about the fact that the market is down and your portfolio has lost money?
I expect to hear some form of, “Not great.”
But there’s a spectrum of “not great.” On one end, “this stinks, but I’m not worried.” On the other end, “I’m completely freaking out – where’s the eject button?! ABORT!!”
The goal of financial education and investing literacy is to ensure that people feel comfortable on the good end of that spectrum. My first goal would be to make sure Christina is there.
And if she’s not there? That’s a sign that her portfolio might need an adjustment. We’ll cover that later.
Goals, Risk, Timelines
Next, I’d ask Christina about her goals, her risk tolerance, and her timelines. Based on her chosen portfolio (globally diverse stocks), I’m expecting that she’d answer:
- Her investing goals are longer-term (e.g. retirement savings)
- Her risk tolerance is moderate
Further reading on risk: the risk/reward relationship.
I’d ask Christina – “Have the current market or geopolitical events changed your goals, your timeline, or your risk tolerance?”
This is the same question I asked you guys last week in the “8 questions to ask about Ukraine/Russia” article.
For most of you, the answers are no, no, and no. Your goals, timeline, and risk tolerance have not changed because of the war in Eastern Europe. And therefore, your target asset allocation should not change.
But the Market is Down!
Christina has a point. Millions of people have worries like hers.
“The market is down! Shouldn’t I be worried?!”
My first recommendation: read about Mr. Market.
And then remember: “the market” is simply a group of people. Those people all have opinions. Optimistic opinions lead to buying, buying leads to increased prices. Vice versa for pessimism, selling, and decreasing prices.
“In the short run, the market is a voting machine.”Ben Graham
Right now, the average opinion in the market is more pessimistic than it was a month or a year ago.
But those people in the market all have unique goals, unique timelines, and unique risk tolerance. Different ones than yours.
Stockowners with short timelines might be panicking right now. They’re selling and driving stock prices down. Should you follow their lead? Listen to their opinions? Copy their votes? No! Certainly not if you have long-term goals!
I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”Warren Buffett
You don’t have to be greedy, per se. But if you have long-term goals, don’t be fearful. And I would certainly “close the doors” and ignore the daily volatility in the market.
Should Christina Continue Investing?
Should Christina continue investing? Should a big event stop her from investing?
The idea of dollar-cost averaging (or as Christina wrote, “averaging down”) is key here. Using “DCA,” Christina would deposit the same amount into her investments at the same frequency, regardless of any shocking events (e.g. war).
For example, I use DCA in my Roth IRA. I contribute $500 every month. The same amount ($500), the same frequency (every month).
If Christina stopped investing now, it’d be a form of timing the market. Big tip: don’t time the market.
A correction, a bear market, a crash…they’re coming. They’re always been coming and always will be coming. The market ebbs and flows. But the important questions to ask are:
- “Is it worth predicting the timing of that crash?”, and
- “Is it worth holding onto cash until after the crash?”
The answers are:
Should Christina Still Invest Into International Funds, etc?
Again, I’d ask Christina about her goals, risk tolerance, and timeline? Ideally, every person should build their asset allocation based on answers to those three questions.
Now that times are turbulent, we ask: “Did her goals, risk tolerance, or timeline change?”
If the answers are no, no, and no, then there’s not a sufficient reason to change asset allocation. In other words, stay the course!
But a question that you should consider is, “Did I pick the right asset allocation in the first place?”
Owning 100% Bitcoin feels great when Bitcoin rises 300% in a year. But if you’re panicking because Bitcoin dropped 50% in a week, ask yourself: “Was 100% Bitcoin the right choice in the first place? Was I ready for that kind of downside risk?”
Similarly, if your portfolio has you genuinely worried right now, ask yourself some hard questions.
Is this more risk exposure than you can stomach?
Should you make a permanent, long-term asset allocation change?
In other words:
- Current events might have unearthed a previously-hidden need for change. A change was justified before. You just didn’t know about it. Pending war made you aware of your true risk tolerance.
- Or, a change is not needed at all. Stay the course.
In either case, the “right portfolio” three months ago is probably the “right portfolio” today. It’s simply a matter of whether you were aware of it.
- Should Christina continuing investing now, even while the market is down? Yes. Her goals, timeline, and risk tolerance haven’t changed. But she could consider asking if her asset allocation was correct in the first place.
- And should she still invest in international funds, despite unrest abroad? Yes. Her goals, timeline, and risk tolerance haven’t changed. Her asset allocation shouldn’t change either.
- Was she wrong for beginning her investing career when the market was near all-time highs? Certainly not. Much of long-term investing involves adding to your portfolio at or near all-time highs.
Thanks for the great questions, Christina!
Readers – let me know how I can help you!