Can I Crash Proof My Portfolio?

The headline for this column asks the wrong question and it will produce the wrong result.

Too many people worry about an oft-mentioned crash in the market. There are pundits who want to scare you into buying their books that will tell you how to save yourself and your hard-earned money.

The right question to ask yourself is, “Can I crash proof my behavior?”

There are certain things you must do to grow your portfolio.

If you are not a pro at this, you will need to think, conduct research and use enormous discipline like a pro.

CNBC can make it sound easy. Just buy the latest company being hyped. Buy it today and at the first sign of weakness sell it. That’s a loser’s game!

The amateur investor will almost never do as well as a professional manager. The truth is that it’s a full-time job and demands significant emotional discipline.

I’ve been doing this for 53 years and been through all the down markets since !972-1973. That includes 1989, 2000-2002, 2008-2009 and 2020. There were a multitude of corrections along the way. The crashes ranged from 30% to 50% down for the Standard & Poor’s 500 Index.

During the tech crash (2000-2002), the tech-heavy NASDAQ was down 85%. Some investors were virtually wiped out.

Consider the following steps that will help you have a successful plan.

How Much Are You Going To Invest?

If you have $200,000, are you going to invest a portion or all of it?

Some people want to start slow and add when their confidence builds.

Are you going to invest on a regular basis, like so much each month? This step helps frame the actions of the other steps.

Why Am I Investing?

What is your purpose?

Be very specific on this. This will create tangible goals, such as buying a house, a car, starting a family, providing for your children’s education, vacations, buying a business and retirement.

List your goals and prioritize them. Then each year measure your progress.

Figure out how much money you will need for each goal.

Money needed for short-term goals of five years or less should not be part of your investment portfolio.

If there is a significant correction or crash, you may not have enough time to recover to meet the goal.

How Much Time Do You Have To Reach Each Goal?

When you know the amount of time you need and the money required, you can more accurately calibrate your progress. This will also enable you to make any necessary adjustments along the way.

Risk Is The Most Challenging Thing To Figure Out

You can take all the risk quizzes available and they still won’t define clearly how much of a decrease in your portfolio you can handle.

Many advisors will give you a quiz that results in a number like 5 or 6. The same programs measure the risk in your portfolio.

The noble idea is to have the same risk number in your portfolio as your personal risk. I like the exercise and some of the information is useful, but not the ultimate answer. The ultimate answer is how far down can your portfolio go before your stomach starts churning or you start losing sleep?

It doesn't get more real than that.

If you have $100,000 and it goes down to $90,000, how do you feel? If it goes down to $80,000?

You may have thought you could handle a 10% drop, but when you see it in actual dollars, it’s different.

It’s at this point some investors sell everything and get out of the market. Some even feel they have learned a valuable lesson and never get back in.

That’s a big mistake and can destroy your plan.

Perhaps some adjustments and reallocation are necessary, but by staying with your plan you will be there when the market rebounds.

There is no guarantee the market will rebound, but in the history of the markets there has always been a rebound. It’s just been a matter of how much time it takes. It has taken as long as 10 years or more, but it has always rebounded.

How much patience will you have to see your plan work?

Where Are You Going To Invest Your Money?

We keep referring to the “market,” but there are many parts to that market.

In what sectors of the market will you allocate your money? How do you create an effective balance in your portfolio to sustain some of the rough times ahead?

What are the main assets in the market?

Think of market assets as cash, stocks, bonds (fixed income), real estate and commodities like gold, silver and platinum.

The most traditional strategy has been to allocate 60% to stocks and 40% to bonds. This is something that needs to be customized to your own situation. I almost never use that formula because each individual is different.

That’s also why I don’t like model portfolios. The models are always a compromise on your personal situation.

Once you decide on the asset categories, then you have to decide how you will access those asset classes.

Will you buy individual stocks and bonds or will you use mutual funds and exchange traded funds?

This process is called asset allocation and it is the most important step in determining your success in investing.

Value Vs. Growth

Will you invest in value or growth?

Value is when you invest at a discount. Growth is when you pay current prices. There are managers who specialize in these approaches.

Also, will you use passive investments like indexes, or active management like active mutual fund managers?

All of the points mentioned in this column need to be put into a holistic strategy.

Vern Hayden is a certified financial planner and the author of “Getting an Investing Game Plan.”