Friday, November 21, 2008

What I learn in this crisis

Short-term goals in long-term strategies

Although you think of yourself as an investor who is in it for the long-haul, that doesn't mean fundamentals go out of the window. Yes, time horizon is very important in investing. You can dollar-cost average your way out of the cycles but equally important and blindingly obvious is the simple logic of "buy low, sell high". Although your long time horizon can beat the odds in the long run of economic ups and downs, you can make your money work even harder by adjusting when to pull back and when to throw (some) caution to the wind (light breeze). Now may not be the time to just plonk your $$ onto the table but money parked at the side remains static. Although that investment-linked policy you bought at the bottom of the downturn back in 1998 is super positive, you can choose to protect that profit by getting yourself into a "defensive" mode. But did you?

Set a cut-loss point and stick to it
You bought into China funds and other funds from other blocs eg. BRIC, MENA and GEMS but you did not go in with an exit strategy. Witness the mess in Afghanistan and Iraq. Even the Israelis are doing it wrongly against the Hezbollahs. Know what is the point at which you decide enough is enough (10%?, 20%?) and be disciplined enough to stick to the plan.

Lock in profits
Even if you are in it for the long haul, there is nothing wrong in protecting your profits by putting them into less risky funds (cash, bonds blah). And counter-intuitively, this is when the profits are being raked. Just like there is no "best time" to get into the market (don't ever try and catch the bottom), there is no "best time" to get out. Go in progressively and pull out in a likewise manner.

Keep an "opportunity fund"
This is for times like these. There is value in alot of investment instruments. Some people increase their principal by two-, three- and even four-folds during crises.

The problem with lump-sum investments
In a flooding tide, lump-sum investments will yield fantastic profits. But when the flood is ebbing, lump-sum investments gets you ballasted. If you bought into funds from the middle or 3rd quarter of last year, you know what I mean.

Why dollar-cost and value averaging can work for you now
If you don't know how to make the best use of this crisis, go read up on dollar-cost averaging and value averaging. Then start somewhere, not just anywhere. Find value. And start now or soon. It will pay back in 5 years or so.

Time can mitigate some risks in investing
Only some risks. And don't forget, you get older as each year passes and you feel your losses more than you feel your profits.

I will elaborate. And use this entry as a reminder for myself.

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