If you’re trying to learn how to manage your money and your risk exposure, you may be asking: how can I invest when the world’s economies are so uncertain? COVID-19 has caused a lot of investors to rethink their investment strategies because economies have slowed in the wake of the pandemic.
This is the topic that we’re going to be discussing today to help you better manage your money and risk exposure to weather potentially volatile markets.
Understanding the Need for Risk Management
Risk management is a major part of a lot of people’s lives. Think of it this way: you have insurance, right? You likely have insurance on your home and automobile. If a fire breaks out, you know that the insurance will cover the expenses to rebuild and get right back on with your life.
But do you have insurance on your 401(k)?
Since 1926, there have been 16 bear markets that occurred roughly every six years. During these periods, the market took a dip for over a year and a half, typically 22 months, and the market fell 20%, 30% or even higher during this time. On average, markets lose 39% of their value during a bear market.
For many people, this is a fire that is obliterating their 401(k) and retirement. Risk management is the insurance on your retirement to lower the risk of cutting your investment portfolio in half when a bear market occurs.
Importance of “No More Pies” Methodology
What “No More Pies” really means is that there’s no more standard pie chart that is given to you by a financial advisor and never updated.
A chart may be viable and worthwhile today, but markets change far too often to just follow without adjustments. Young investors may believe that they can ride the wave and not have to worry about market fluctuations.
But as you age, you should be lowering your risk tolerance.
No one wants to lose 50% of their investments. The investments may come back, but there’s never a guarantee. Even when they do come back, you’re looking at 7 to 10 years before recovering from a 50% loss. A person that is 65 waiting 10 years to recover their losses is going to lose a lot of valuable time in the process.
It’s also harder to recover from the loss when you’re drawing from the portfolio to live.
Managing Money During a Crisis: Why Not Being Passive Benefits You
Money management should always be on the top of your priority list because a passive portfolio is often set for failure. In the last year alone, we’ve seen markets highly influenced by both politics and the economy.
Passive investing is easy. You put your money into a bunch of financial vehicles, sit back and hold. The buy and hold strategy may work with some stocks and be a part of your portfolio. Yet, the passive investor isn’t adjusting to the market change or signals that show that this commodity is going to fall or that a cryptocurrency is going to tank in the next few weeks.
During a crisis, you want to:
· Slowly start adjusting investments as problems start arising
· Monitor and watch the markets for indicators of something brewing
· Continue monitoring and adjusting your risk to navigate market volatility
A lot of people get overly concerned, pull all of their money out of the markets and lose out on the opportunity for strong market gains because they fear losses due to political or economic concerns.
It’s important to look at all of the variables, make daily assessments and adjust as risk increases or decreases.
If you go with gut decisions or you’re too cautious, you may miss out on market opportunities out of fear that you’ll make a misstep during a crisis. One of the worst choices that you can make is not doing anything and hoping for the best.
When you stay on top of the markets and adjust based on the indicators that are coming out daily, you’ll be adding that insurance to your retirement accounts that wasn’t available before.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.