Tips for Expat Investors: Dealing with Bear Markets
By Chad Creveling, CFA, & Peggy Creveling, CFA
After recent stomach-churning gyrations in the markets, many expat investors may be ready to throw in the towel. And who can blame them? With the possibility of a global economic recession, continued high oil prices, ongoing war, and leadership assassinations and resignations, there seems to be no place to hide. Major indices such as the S&P 500 and NASDAQ are off over 18% and 25% respectively this year as measured in USD, and many of the other markets are even worse off. In times like these, it’s easy to get spooked into making emotional decisions that can derail your financial future. As always, the best course is a calm, rational approach. Here are a few steps you can take now to help you take an objective look at your portfolio, limit the damage, and help protect your financial security.
First of all, don’t panic. The "losses" in your portfolio aren’t permanent unless you make them so. Fear-based selling just locks in losses, triggers taxable capital gains, and increases the chance you will miss the next up leg of the market. Giving in to short-term emotional decision-making is the reason most individual investors fail to achieve their investment goals.
Review Your Emergency Funds
Ensure you have 3 to 6 months (more in some cases) of living expenses set aside in a cash account to fund unexpected events such as a job loss or illness. The funds should be liquid, risk-free, and in the currency you will likely need them in. If you live in Thailand and have no connection to Australia, the AUD is not the place for your emergency funds.
Review Your Short-Term Goals and Their Funding
Take a look at your financial goals over the next 3 to 5 years. Set aside funds for these goals in low-risk, liquid investments in the currency that will fund the goal. These funds do not belong in equity. In fact, it may make sense to hold these funds in an account separate from your long-term portfolio to help you manage the different asset allocations, time horizons, and risks associated with your various financial goals.
Make Sure You’re Diversified
The point of diversification is to reduce the risk of catastrophic loss by not having all of your funds in one investment. It doesn’t mean you will never experience a market downturn or a loss. You should be in a broad range of both fixed income and equity asset classes held in a mix that is appropriate for the amount of risk/volatility you can accept in your portfolio. The S&P 500 may be down 13.5% since April 29, but no properly diversified portfolio should even be down close to that in this period.
Reassess Your Risk Tolerance
If you’ve ever worked with a financial advisor, you’ve no doubt filled out some version of a risk tolerance questionnaire. The point of the questionnaire is to help in the construction of a portfolio that matches your willingness and ability to bear risk in your investment portfolio. It’s one thing to say you’re willing to bear a 20% markdown in your portfolio’s value during the space of a tough year in the pursuit of longer-term investment returns. It may be an entirely different thing when your portfolio is actually down 20%.
This is a good time to get a read on your real risk tolerance. Determine the short-term loss you were able to bear before becoming extremely uncomfortable. That is likely a closer estimation of your risk tolerance than any questionnaire can provide. If the current market downturn has already exceeded your comfort zone, you may need to redo your portfolio. It’s better to have a more conservative portfolio that you can stick with throughout the market’s ups and downs rather than a more aggressive portfolio you are forced to abandon when the going gets rough.
Don’t Be Seduced by Apparent “Safe Havens”
Be wary of “safe havens” like gold, bitcoin, or any asset that has become a home for investors fleeing risk. Investments like these rise not because of any intrinsic economic return afforded investors, such as that provided by stocks and bonds, but simply because more and more people are buying them. Increased fund flows to investments such as gold are driven by more and more investors fleeing risk (or speculating) rather than by any long-run economic return embedded in the asset. The meteoric rise in the price of gold, while other assets are falling, can give the illusion of security, but anything backed by little more than pyramid buying can collapse just as quickly. Investments like these can be a bit like a Ponzi scheme. You don’t want to be the one left holding the bag.
Continue to Rebalance or Contribute to Your Portfolio
In times like these, it may be tempting to stop contributing to your portfolio or avoid rebalancing back into asset classes that have been going down in value. This is where the gains are made though. If you wait until everything feels rosy, all you are doing is buying in at the peaks, which will significantly reduce your long-run portfolio return. You can’t time the market, but by consistently contributing to your portfolio and/or moving to your core investment weightings, you can ensure that you will put more money to work when prices are low. This will help set you up for better investment returns over the long run.
The investors who will come out ahead, in the long run, are the ones who can avoid being panicked into the destructive cycle of buying high and selling low. Do yourself a favor and turn off the news. Make sure your short-term goals are funded appropriately and then do something relaxing. Later, come back and take a calm, objective look at your portfolio.
This article is a revised and updated version of one that had appeared previously on www.crevelingandcreveling.com
About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. The firm is a Registered Investment Adviser with the U.S. SEC and is licensed and regulated by the Thai SEC. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future.
Copyright © 2022 Creveling & Creveling Private Wealth Advisory, All rights reserved. The articles and writings are not recommendations or solicitations, and guest articles express the opinion of the author; which may or may not reflect the views of Creveling & Creveling.