Free Lunch Friday #2: How to invest when everything is on fire.
Learn how to rebalance your portfolio, surviving big losses, and discover how forgetting your brokerage account password can make you win big.
Howdy financial wizards! This month it’s all about having our portfolios on fire, balancing them, and how to buy crypto in Canada. If you have any suggestions of topics you would like me to tackle, let me know!
Forget your investments to beat active investors
I hear about investors trying to “beat the market”(AKA active investors) but I believe it’s not worth it. You will spend a lot of your precious time researching and monitoring stocks while probably getting average returns or worse: losing your money.
The noise, especially with the current market, should be ignored. When you’re investing long-term, you need to zoom out. People love to talk about new trends in the market and why you need to sell or buy because investing is an emotional game.
But let’s get back to active investors and how you can best them:
In 2014, Fidelity Investments did a research on account performance. They found that the accounts with the best returns were the investors that forgot they had an account.
It’s crazy to think about, but it makes sense. Our minds are working against us when investing so if you let the market follow its course, you should get interesting returns by keeping your investments for a few decades.
How to invest when everything is on fire
I’m sure you don’t need to read this newsletter to know that the market was on fire in May.
Experts think we’re going into recession sooner than later so that means that we might be entering a bear market.
As opposed to a bull market when stocks goes up, a bear market is when stocks goes down.
If you invest during a bear market, you’re increasing your chances that your investments will flourish in a bull market. The key is that when your portfolio is on fire, just don’t look at it.
Here’s my best tips to invest when everything is on fire:
Stop listening to the noise: You’re scrolling through LinkedIn and you see “Investors BEWARE, tech stocks are now down 1000%!!!”, your reaction should be: “Cool, I don’t care”. This is just noise that shouldn’t matter to you. Yes, you can make small investments decisions based on some of these articles but the majority of your portfolio should not change because of these news.
Zoom out on your investing journey: If you invest for a period of 10, 20 or even 30 years, why do you care that your portfolio is down 20%? You don’t need the money for the next month or even the next year, so zoom-out and check your portfolio once a month instead.
Change your asset allocation: If you’re unable to sleep at night because your portfolio is down and you cannot bear the idea of being in the red, there’s a solution. It’s not a one-size-fits-all, but you can increase the percentage of bonds in your portfolio. Bonds can reduce the volatility of your investments, but give smaller returns as well.
Delete your investing app: If you can access your portfolio performance easily like on your smartphone, you will think about why your investments have been negatives for X months and you might even take the impulsive decision to sell everything. By deleting the app and only managing your assets on your computer by example, you can become the boring investor that actually make money in the long run.
How to rebalance your portfolio
Why do I need to rebalance my portfolio? Shouldn’t you just “set it and forget it” like you say?
That depends. If you invest mainly in stocks and you’re 30 years away from retirement, that’s fine if that’s your time horizon to invest. However, the closer you are from retirement, the more stable your portfolio needs to be. It can be a good idea to increase your asset allocation towards bonds because they are usually much more stable than stocks.
Rebalancing your portfolio is part of a long-term passive investing strategy. It’s similar to getting your oil changed on your car—you need to do it to make sure things go smoothly.
There’s two methods to rebalance your portfolio:
Sell high-performing investments and buy lower-performing ones.
Allocate new money strategically. For example, if one stock has become overweighed in your portfolio, invest your new deposits into other stocks you like until your portfolio is balanced again.
Now that you know those two methods, let’s see the steps to rebalance your portfolio:
Steps to rebalance your portfolio:
1. Choose when to rebalance your portfolio
Decide an ideal timeframe; it can be once a year or every six months. That way, you’ll be able to stick to a schedule.
2. Define a target asset on your allocation
Let’s say you’re planning to retire in 30 years and your asset allocation is 80/20 with stocks and bonds respectively. You decide that your target asset is 10% (the sweet spot is between 5-10%). If your portfolio goes to 90/10 with your asset allocation, you will rebalance it, even if your rebalance timeframe is in 6 months.
3. Select your rebalancing method
You have two options: doing transactions with your current investment or allocating new money strategically. If you decide to sell high-performing investments or buy lower-performing ones, you need to change your strategy a little bit and do research in some cases.
Allocating new money is the preferred choice here because when you’re going to do your monthly transactions, you can either invest more towards specific stocks or bonds. This new money should ideally rebalance everything and then you’re good to go!
4. Repeat the cycle and stay the course
Now that your portfolio is balanced, you’re all set. You can push later your defined timeframe to balance it again and maybe decrease your target asset threshold if necessary (e.g. from 5 to 10%). The more time you’ll spend on the market, the more you’ll get used to rebalancing your portfolio based on your investing objectives.
My watchlist
BTF | The Valkyrie Bitcoin Strategy ETF is a NASDAQ Exchange-traded funds mainly composed of Bitcoin future contracts. The value of this stock isn’t set up by the price of Bitcoin, but instead by the futures related to bitcoin. Since crypto is becoming more and more popular (3.2% of Canadians own some), it just makes sense to me to keep crypto futures in mind.
As a reminder, a future is a contract agreement about a specific price at a specific time being traded on the market.
UPST | Upstart Holdings Inc is a cloud-based AI lending platform. As a fintech aficionado, I'm following up with the latest Buy Now Pay Later (BNPL) of the industry and Upstart made some noises last January because of an attractive valuation, huge margins, and triple digits revenue.
They recently suffered a big drop of 60% after deceiving quarter earning results. I will be following what is happening with them in the future, especially with the interest rate hikes.
PLTR | Palantir Technologies Inc is a company supporting national defense and pandemic response in the US. I already have it in my portfolio but the shares recently plummeted of 22% mid-May. I’m planning to buy some shares again because I believe in the company potential.
It’s considered a bit of a meme stock, but since the value declined significantly it might be time to “buy the dip”.
Financial Software of the Month: Shakepay
In 2022, you’re either all in or all out with cryptos. Indifference against digital currencies is slowly decreasing as the crypto industry became a behemoth.
I started buying Bitcoin a year ago. A friend talked to me about this app and I decided to give it a try June 2021. I was curious about it in 2017 but it was rather complicated to buy Bitcoin at the time.
Let me tell you the pros of Shakepay:
It’s simple as an e-transfer.
Their referral program gives you free “satoshis” (100 millionth of a Bitcoin).
The Shakepay Card gives Bitcoin cashback rewards.
However, there’s also cons:
You can only buy Bitcoin and Ethereum.
Their customer service seems ineffective with forever wait-time with no responses.
If you’re looking to buy crypto without hassle and on mobile, use my referral link* to get $30 after buying for $100 of crypto.
*I’m referring this product and we both get money if you qualify to the conditions.
That’s all for this month folks! If you learned something, please share with your friends that are interested in investing and personal finances.
Note that I am not an investment professional, and this is not investment advice.