How to Ensure You Don’t Lose Money Part 2

Money

We’ve examined how the markets function in cycles and now we’re going to look at how time plays a role in risk.  The reality for anyone investing money is they eventually plan to take it out of investments and use it, after all, what’s the point otherwise?  The question is when?

Here’s the risk, the market moves in cycles varying from boom to bust to recovery, to a sideways market and then another boom, at least as a general rule (it’s not 100% accurate but for our purposes it is close enough).  What if you needed the money, say to get married or for your child’s education in March 2009 or January 1932 just after a major stock market collapse?  You’d likely be forced to either cash out at a major loss or not spend the money as you’d planned, neither is a pleasant prospect for your family’s wealth or children’s education.  So how do you avoid this?

If you want to avoid losing money you need the freedom to choose when to sell.

Given time markets as a whole (not to be confused with individual holdings such as individual stocks or properties) tend to recover in price.  People know this about property almost intrinsically and it’s what stock brokers and financial advisors will often tell you “you’re in this for the long haul” when things are going down.  There’s some definite truth to it though, the key is you need to plan your investments and spending so you can wait until the value has increased in order to sell.

How does this work?  Well if the market is really high and you’re going to be needing the money in the near to mid future, sell part or all of the investment, in other words always make sure you’ve got cash around to cover your short to mid-term needs, the last thing you want is to be selling your investments in a down market because you lost your job.

If you have upcoming cash requirements such as retirement, paying for a child’s education, etc. reallocate some of your investments into investments with short term price stability such as short term bonds or GICs to ensure you aren’t going to lose the money when you exit the investment.  Note, you don’t need to do this for all your money, just enough to cover the needs.

Enter an investment with the expectation of holding if it drops in the short term.

Your expectations and planning play a big role here and applies to buying a house as well as buying equities.  Enter the investment with the thought “if this goes down I’m going to make other arrangements to ensure I don’t have to sell until it recovers”.  A lot of people lose money say by buying  house then need to relocate for work and have to sell when the market is down, often paying mortgage payout penalties in addition to realtor fees and taking a loss on the investment itself.  What would have been much more prudent is to have been prepared to rent the house out while waiting for the market to recover.  Of course the decision isn’t so simple if you’re caught in that situation, but if you’d planned that way from the beginning you’ll generally be ok.  Consider if you’d purchase counter cyclically for below market value then you’re unlikely to find yourself in a position where you’re taking a loss to begin with, but at least if you do and you’ve planned on being able to hold you’ll be better off.

This comes down to the last consideration to protect yourself, which is to have at least some of your portfolio in investments providing cashflow (either dividends or interest).  Consider for example if you purchased the stock of a company or fund and the price goes down.  The market will rise and fall but if the stock or fund you purchased pays dividends then at least you’ve got cashflow to help you weather the storm.  Likewise for real estate, if you’ve got rental cashflow it makes holding much easier than if you have negative cashflow.

One of the biggest keys to not losing money is being able to hold until you have recovered your initial investment or have made a profit.

If you’ve got investing questions you’d like to discuss or like us to cover please click "Ask a Business Question" in the lower right corner of the screen to send it to us, looking forward to hearing from you.

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