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What Can This Week Teach Us About Investing?

TL;DR: diversification

Unless you live under a rock, you’re well aware of the damage done in the stock market this past week. All three major U.S. stock indices—the Dow Jones Industrial Average, S&P 500 and Nasdaq, fell into a correction, meaning they declined at least 10% from their recent highs. 

Reddit User: r/ErrorProxy

Some of the stats from this week are truly remarkable. By falling into a correction in just six days, the S&P 500 had the quickest correction since the Great Depression in 1933. The Dow fell 1,190.95 points on Thursday, its largest single-day point loss in history. Global stocks lost more than $6 trillion over six days at their lows of the week. 

It’s easy to sit here in hindsight and mention all of the signs that pointed towards a move like what we saw as inevitable. Whether it was the r/wallstreetbets crowd printing money on highly speculative stocks, people trading their Dow 30K license plates for Dow 40K ones or the curse of the Barron’s cover, which said the Dow may hit 30,000 “five years ahead of schedule.”

So with the convenience of hindsight and the ability to plan for the future, how should you be invested to be better prepared for weeks like this? 

Don’t Put All Your Eggs In One Basket, They Said

If you’re investing, the first thing to realize is there will always be risks, especially risks of weeks such as this. No asset goes up all of the time and during selloffs like this, uncorrelated assets can still all go down.

With that being said, selloffs such as we saw this week shouldn’t scare you from owning stocks. Assuming you’re not a day trader, investing is a long term decision. The percentage of stocks you own compared to your overall investments, as well as the types of stocks, is a decision that varies among people based on many factors such as age, risk tolerance and the amount of money you earn and need to pay your expenses. 

As mentioned, diversifying doesn’t necessarily make you immune from losing money on weeks like this, but you never want to put all of your eggs in one basket. Besides stocks, fixed-income investments are the most common investment. More popular with older individuals, they can still serve a purpose for anyone’s portfolio. 

This week has also demonstrated why it’s important to have some of your funds sitting in cash. We know cash is boring, but in turbulent times in the markets, cash is king. Having cash available enables you to have money ready to buy strong companies that may have been panic-sold. 

There’s a handful of other less liquid assets that can also find a place in your portfolio. Real estate is less prone to the day to day swings of the market, as well as can generate stable income if it is a rental or commercial property. Physical precious metals such as gold and silver are popular investments, as well as fine jewelry such as watches or handbags

Courtesy of Calli Moore, Daisy Dodd-Noble

Bullish previously wrote about two other assets that are increasingly popular—spirits and fine art. Over the last decade, value for “super-premium” bourbon has grown from $63 million to $643 million, according to the Distilled Spirits Council. Ways to invest in spirits include buying bottles or barrels, crowdfunding spirits companies and investing in spirits stocks. 

Art is becoming increasingly popular among investors, particularly millennials. According to 2018 data from Bank of America’s US Trust Insights on Wealth and Worth report, 72% of Millennials now incorporate art into their wealth structuring and planning. Like all investments, art involves risks as well. Sometimes you never know what the value of art may end up being, but there are plenty of examples of art that has appreciated over time. Worst case scenario, you still have a piece of art that you enjoy hanging in your home. 

It was undoubtedly a rough week in the markets. This week demonstrated the importance of not putting all of your eggs in one basket. It’s important to stick to your principles and not make any rash decisions when it comes to investing during times like these. 

Header image courtesy: We Love Buzz, YouTube

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