Knee-jerk reactions to troubling headlines may cause investors to fall into the common pit of selling low after buying high. Lately, we have had a multitude of these headlines from civil wars, earthquakes, tsunamis, tornados, nuclear disasters, recession fears, debt ratings…
Whether or not we have personally been affected by a natural disaster, the impact on our wallets can be felt by the increases in oil prices or higher utilities caused by the heat wave currently gripping the nation.
As I have warned before, knee-jerk reactions in most aspects of life are rarely productive. It is time again to realize the “glass is half full” and remember there are always potential investment opportunities in the face of adversity. Recently the news reported Warren Buffett was increasing his position in Wells Fargo & Company (WFC). I am certain this is not his only recent activity, but it struck me as interesting. In the midst of news about banking concerns both here and abroad, Warren Buffett, a man many view with extreme prowess regarding investing, increased his position by 9.7 million shares. It would appear Mr. Buffett is “shopping” while the sales are on. The value of this stock had fallen below $10 back in 2009 during the U.S. banking crisis and recovered within months to trade between $21 and $33 per share since that time. While I cannot read Mr. Buffett’s mind, it would appear he believes there is value in this corporation while their shares are currently trading below $24.
To invest like Buffett does not require billions. It does require segregating investment portfolios into strategies. Part of the solution requires each investor have a comfort zone. This would be funds which are not at significant risk, and thus available for use should the markets go through a bear decline similar to 2008 and early 2009. The amount in this could be two or three years’ worth of consumption. Those spending $2,000 per month from investments, would want to have a minimum of $48 to $72 thousand dollars in their comfort portfolio. The remainder of the portfolio could be invested for longer term objectives and perhaps utilized to pick up quality investments when they are on sale, knowing they may have to be held two, four, or five years before their value matures into gains.
Another way to avoid damaging investment portfolios during periods with significant corrections or volatility is to divide the investment portfolio into two pots. Investments hardest hit during corrections often are the best performing during the recovery. For those investors currently pulling funds from their investments, it would be beneficial if the redemptions or sells did not come from the positions hardest hit. As an example, if there are two holdings, A and B, where holding A lost 2 percent during a correction and holding B lost 12 percent, in most cases it would be better to pull current living expenses from holding A. If the monthly draw was $2,000, and the markets recovered after three months with holding A climbing 3 percent and holding B climbing 10 percent, the missed recovery in holding A would be $180 (3 percent x $6,000), but the missed recovery in holding B would be $600 (10 percent x $6,000). It is not unusual for investors to sell their hardest hit investments and move those funds to more conservative positions. Thus, during the recovery the account does not progress as well.
If distributions are occurring from investments or about to begin, setting aside two to three years of income in the conservative portfolio should allow the use of the above strategy. The primary account should still be the source of the distributions during normal or increasing years. When a significant decline occurs in the market, the primary account can be managed first for protection and then recovery. During this time the distributions once taken from the primary account, can now be pulled from the more conservatively managed account.
Those investors who stayed in the market or shifted money around during this past recession were rewarded handsomely provided they stayed through the end of 2009. But, for investors who felt they could not afford to lose value, they generally sold when their values were near their lowest points. Those selling during corrections most often will not return to the market until they confirm the market is on the upswing, so they wait for proof. In this case, proof generally comes from an increasing market value and thus the nervous investor misses much of the recovery.
Yes, this is a little complex and does require time to manage, but it allows the primary account to take advantage of opportunities created by the decline. Only time will tell if Mr. Buffett’s additional purchase of Wells Fargo & Company will be profitable. Now that we can look back, the numbers of opportunities created by the “great recession” were endless. In order to benefit, it just required investors with long-term view points.
For assistance with insurance, estate planning, and managing investments, contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.