Forget Halloween. Having seen the value of their portfolios drop by double-digit percentages, the last month has already provided more than enough shocks to the system for some investors.
Since the most difficult moments in investing often provide the greatest opportunities to learn, here are three important questions all Fool readers might like to ask themselves at the current time.
1. Do I know what I’m doing?
The wonderful thing about investing is that it requires no formal qualifications — anyone can make money from the market. Unfortunately, the opposite is just as true. As Warren Buffett — the best investor who’s ever lived — reminds us, investing is “simple but not easy.”
Whether it turns out to be the beginnings of a bear market or a mere correction, the sudden drop in the prices of stocks over October is a great antidote to any feelings of invincibility that may have been picked up over the course of the longest bull market in history. It’s easy to become complacent when — despite the odd wobble — markets have been steadily increasing in value since the dark days of the financial crisis.
Recent weeks give us the chance to re-evaluate whether we really do have an edge on the market. Some may realise that stock-picking, as opposed to passive investing, just isn’t for them.
2. Am I taking on too much risk?
Following on from the point above, knowing what you’re doing doesn’t mean you’re doing it right.
A simplistic view of investing is that it’s about making as much money as you can. I prefer to see it as learning how to grow your wealth in such a way that allows you to reach your financial goals while minimising the possibility of losing your shirt. Assuming you’re doing this on your own rather than employing the services of a financial adviser, that means regularly evaluating your tolerance for risk.
October has provided a perfect opportunity to learn more about how you react when things get volatile, something that’s hard to do when everything is appreciating in value. Put simply, if you’ve been unable to sleep soundly over the last few weeks, you may wish to question whether your strategy is appropriate.
Even if you are happy with the shares you hold, signs that the market may be turning should encourage you to reassess the way in which your money is allocated. Thanks to its tendency to be negatively correlated to equities, having a proportion of your cash in assets such as gold, for example, might be an idea.
3. Am I capable of buying when others are selling?
We’re told by the world’s greatest value investors to be ‘greedy when others are fearful’. October has given investors a snapshot of just how capable we are of applying this advice in practice.
Don’t despair if you’ve been hiding behind the sofa. As humans, we’re programmed to run with the herd. That’s why pound cost averaging — investing the same amount at regular intervals — can be a great solution. Better to buy some shares when they’re cheap rather than none at all.
Of course, this means having a sufficient amount of cash to do so. That’s why it’s always advisable to keep some powder dry for the inevitable downturns.
