Every summer holidays Anne and I do a review of our financial health. This is an exercise that I recommend to everyone, as it sets a solid base on the family’s future projects for the next year. Here is what we do: -
On a rainy day (we always get a few of these), clear the kitchen table and set out a large sheet of paper.
Down the left side of the paper write everything you own and an estimate of its value.
Down the right side of the paper write down all your debts and obligations. Include with this how much it is costing you to pay these debts off.
Across the bottom total all your income from all sources.
Also across the bottom make an estimate of your living expenses.
Now answer these questions: - In the last year, - Has the value of everything we own increased or decreased? - Is our income enough to cover our debt, live comfortably and save? - Do we need to change anything, given the answers to the two questions above?
A very useful exercise, it can be surprising what falls out from this!
For my portfolio 2018 was a year that only held its own with a total return of 2%. The major detractors were the decline in the Australian market and the comparative strengthening of the NZ$ compared to the A$.
The cashflow from dividends remained strong and I had benefited from the long term bonds I had purchased during the ‘08, ‘09’ and 2010 years.
I think I have positioned my portfolio to handle a downturn as I have been through the steps outlined in the next article and pruned out any of the more volatile growth shares.
Here is how I suggest you prepare for a financial downturn.
FIRST: Evaluate your holdings one by one — stocks, KiwiSaver, property, bonds, etc. Look at each holding critically and ask how you think it may perform in a serious downturn.
SECONDLY: ‘stress-test’ your portfolio. If the value of all all your stocks and properties dropped by 25% , would you be okay? Would you be able to afford groceries and petrol?
Unfortunately, too many people never think about that. Maybe they don’t want to. But they should…and by analysing their holdings now, they might avoid getting burned later.
That’s not to say that there aren’t some investments that weather storms better than others.
THIRDLY: Ask what is your time frame? In investing, like in many things in life, the best way to have a good experience is to have the right perspective.
If you are in your 70’s you may not have the time to go through a recession and recovery cycle.
Humans have an emotional tendency to feel twice as much pain from a loss as we do pleasure from a gain. It’s then pretty clear that someone who checks their investment balance every day is not going to have a very pleasant time!
It gets better though. Despite ‘only’ rising on 53% of days, someone who just checked in annually would have seen a positive return 75% of the time. This rises to 98% of 10-year periods and all15-year periods, reaffirming that most short-term returns are ‘noise’ for someone with a long timeframe
Do the steps above, take any necessary actions then feel free to sit back this summer – if your investment approach has been chosen to be in line with your timeframe, aims and ability to ride out shorter term ups and downs, then your portfolio will thank you for it and you will enjoy your break SO much better.