The step by step to start investing (XVII)

(Part 17)

When the financial markets behave this way, with very strong declines over several weeks, a lot of people get scared and make emotional decisions. But it is part of the nature of markets. It’s not the first time it’s happened, nor will it be the last.

This is precisely why it is so important to control our risk, to feel comfortable with our portfolio even at times like these. The markets have always recovered and will do so again, sooner or later. In fact, many great estates have been built at precisely such times: when everyone is panicking and real bargains are being found.

Now, you never know when the markets have bottomed out, just as you never know when they have hit their highs. This is human psychology: when everything is going well, people are euphoric. Prices are too high but because people are optimistic they think they will continue to rise. Sometimes they do and arrive at completely illogical valuations. In the same way, when the markets fall like now, the sentiment is one of great pessimism. It seems that the world is falling apart and everyone wants to sell, regardless of the price.

That’s why it’s important, when we’re building wealth, to save and invest a set amount each month regardless of what’s happening in the markets. When prices are high, that amount is enough to buy less (just like when we go to the supermarket). When everything is on sale, that amount is enough to buy more. This means that we buy more when markets are cheap and less when they are expensive. In the long term this has a positive impact on the growth of our portfolio.

In addition to this, each year we must rebalance our portfolio, because market movements will cause the composition to change and that modifies its risk. Let’s think, for example, that our portfolio is made up of 50% company shares and 50% debt instruments.

If at the end of the year stocks are down 30% since we started, and debt instruments are up 3%, our portfolio is no longer going to be the same. Its weighting will have changed as we can see in the following table. To get it back to 50% / 50% we need to do a rebalancing.

Doing this also helps us in the long run. In this case, the shares are cheaper: rebalancing implies buying more, at a lower price. But when stocks go high again and markets are expensive, the opposite will happen: We’ll be selling stocks (taking profits) to buy debt instruments (and controlling our risk in the process).

What needs to be understood, again, is that as investors we should not care if the markets are expensive or cheap, because they are volatile by nature, there are always cycles and we can never guess when the wind will start to blow the other way. . We have already talked about it, there are many things that cannot be predicted, such as a pandemic, and that can change the course of the economy completely.

What should matter to us as equity investors, with a long-term vision, is to have our risk under control (remember, this is essential, so as not to scare us). We must also care about the perseverance and discipline of saving each month, adding that amount to our investment portfolio and doing an annual rebalancing. Let’s remember that markets are like that, they have good and bad cycles, sooner or later the economy recovers and good companies will come out ahead. When this happens, that perseverance and discipline will be rewarded.

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Personal Finance Coach

Heritage

Senior executive in insurance and reinsurance with strategic business vision, high leadership, negotiation and management skills.

He is also a Personal Finance columnist in El Economista, Personal Finance Coach and creator of the page www.planetusfinanzas.com

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