One of the big factors influencing personal finance decisions is the constant stream of news from across the world, be it politics, election, pandemic, dollar losing value etc. In this post, I would like to highlight few points of how all these seemingly useful information is actually nothing but noise.
Recently I was debating with my colleague in India why Gold is not a good investment for long term. It is true that Gold has run up in its price recently, as the world came to a reality about the unprecedented CoronaVirus pandemic.
Gold is a fear based asset. Whenever the experts conclude that the world is going to almost end and businesses are going to fail miserably, they command that Gold is the safest haven to run with your bag of money.
Stocks are overvalued, the government is playing a game by buying shares and artificially keeping markets high, the paper currencies are losing value and many such doomsday predictions are floating around in the market and social media.
And seeing the rush in Gold prices, I must admit I was for a moment sucked into the FOMO (Fear of Missing Out) phenomena.
But then I rationally thought – Wait a minute. What really has changed and what has happened?
It is true that the COVID-19 pandemic has changed the world, possibly irreparably. But will the world go round without any businesses, jobs, spending, economic activity etc?
Every business will try to reinvent itself post-pandemic, and will find new ways to make money. After all, what else are businesses for, if they don’t make money for themselves and shareholders?
Moreover, what is this fear of paper currency being devalued? Will we go back to the gold standard from fiat currency? No, the pandemic itself and the projection of devaluation of paper currencies (including US Dollar) are not going to roll us back to an age that has been left behind years back. In fact, the world may move towards blockchain based financial systems, where value is not stored in a metal or any institution or controlled by any group of influential individuals.
Let us forget about Gold, as it is only one aspect of this fear psychosis.
There is also a huge amount of speculation about the US post-election results and the policies of the next President on social media. I have come across (not even actively searched) many videos claiming to project investment returns and financial setbacks due to the new President’s anticipated tax changes.
Well changes may be coming, or they are always there. But the fact is that investment does not yield results based on shock therapy or abrupt economic changes.
Investments yield best results when you go by a plan and stick to it, no matter what is happening to the world. Essentially the concept of buy-and-hold. And this is not only money investments, but upgrading your skills, acquiring knowledge etc. are also something that are universal and do not depend on abrupt changes in government or the world activity.
The constant flow and waves are more powerful than one time events.
Since last many years I have been investing in the same manner, month after month and with the same asset allocation in low cost Index Funds and other diversified investments.
And with all these noises around, my portfolio had a healthy return and seems blissfully unaware of the fear psychosis gripping the world.
It is true that occasionally an all-stock portfolio will go down in depressing market conditions and can dip even more than 50%, but that is all paper loss till you actually sell and book the loss.
March 2020 – I moved a large fixed income investment into mutual funds, and saw the value tumbling over 30% in the following months, April-May 2020. At the end of the year, as I got over the depressive state and held onto each one of them, the portfolio is sitting at a neat 11% over the value invested in March 2020. This adequately proves that trading stocks and timing the market (based on news and projections) could actually be devastating.
Equity Investment means you are going to ride out such troughs and valleys and come out ahead the other side, typically after 5-10 years.
For the short term cushion, keep enough cash to ride over the difficult times.
Take care, stay safe, wear a mask and stick to your investment plan.
The virus does not attack your investments unless You want to do so.