“My wife and I earned a combined of $150,000 last year. We have $110,000 left to pay off on our 4-room HDB flat’s mortgage. We have combined $250,000 in our CPF and $200,000 in cash saved up. How well are we doing?”

I would like to ask my readers: How often do your close friends ever confided this question to you? (let me know in the comments for this post below)

As well as I can remember things, none of my friends ever told me this sensitive part of their family life. Our personal finances are a secretive part of our lives that our friends, relatives, and colleagues should never know of.

But because of that, at the back of our mind, we have that same lingering question as the opening paragraph. For some, they believe they still have time to procrastinate and push this question to the depth of their mind. For others, they realize they need to find an answer.

They think their current financial situation is OK. But how could they verify that?

If you wish to know your current health situation, you signed up for a comprehensive health checkup. A health professional will explain your health checkup results.

Could you have something similar to help you assess your financial health and let you know whether you could reach your financial goals?

Today, I am going to introduce you to MoneyOwl’s Comprehensive Financial Plan service. It is currently FREE.

But before you sign up for it, I want to explain the value that you will get from this service and why it is important.

How Often Does This Financial Ponder Enter Your Head?

I work in a firm where prospects come to us seeking financial planning solutions. Outside of work at Investment Moats, I have readers asking whether I can help them with their unique financial problems.

I would like to think that I know a little bit about what occupies some of your money concerns.

Generally, what I came to realize is that people do not seek for a financial plan.

They seek someone or some organization to help them figure out

1. How they are doing currently?
2. Could they or when they can retire?
3. What are the steps to get there?

What I observe at Investment Moats is that I have to validate #2 for people a lot. Different readers have some idea how to do #3 (if they do not have an idea, then I am not sure what they are reading here at Investment Moats.)

Those three questions usually hit you after 35 years old. You got through the hectic 25 to 35-year-old period where your partner and yourself are busy with getting the career on track, getting married, messing with your home and taking care of the baby.

After 35, for some, it is when the couple has slightly more bandwidth to catch a break and think. It is also the period where you might be facing more volatility or stagnation in your partner or your career. You start thinking about the future.

Finance wise, after 35 is also the time where you have dabbled in enough punts, investments you came across.

When you are in your late 20s, early 30s or even late 30s, you could brush off these questions.

As you get ever closer to the standard retirement age, the anxiety in both of you will build-up as you felt that you may not have enough time.

One thing I would tell those who contacted me is… let us figure out how you are doing now. Some folks scare the shit out of themselves thinking they are in such a poor state when their situation is much better than their peers. For some, they genuinely needed help because their situation is a mess.

What we observe at my workplace is that by their 40s, the prospects would have build-up a mixture of financial products/ assets/ plans that they do not have an idea (1) how they should categorize them and (2) whether they still need them going forward.

Why Knowing Your Current True Wealth Position is Important

If you do not have a good idea if you are doing OK, it will be difficult to move forward.

If your finances are in a mess, currently you would not be in a good position to take on more risk in investments. We have to take a step back and arrange your financial house in order.

Building wealth for financial independence is not just about getting the best product. You could get the best product, but if you are in debt, you might gain better performance by paying off the debt. You could also review your policies, cash and other products you have purchased to see if you can re-allocate them to investments that fit your wealth-building better.

For some of you, you might be doing pretty OK.

Knowing that you are more or less on track can is part of the value of engaging a financial planner. The freedom from worry allows you to focus on your work and family better.

Having clarity from knowing how you are, what are the steps to take going forward allow you to focus on executing the steps that take you there.

If you are unsure whether you are doing the right thing, it will be hard to push 100% in one direction. We need help to validate if what we wish to do is the best course of action.

What Should You Find in Your Comprehensive Financial Plan?

To gain clarity on how you are doing, a lot of times you need a professional to help you. They should help come up with a comprehensive financial plan.

MoneyOwl’s 4th Bionic Service With a Robo Platform helps you make sense of your current financial situation. It provides you with a Comprehensive Financial Plan.

The financial plan encapsulates

1. How you are doing now (Your current true wealth position)
2. What are your financial goals
3. The level of income in financial independence (FI) they estimate you would have at the FI age you wish for
4. The financial commitment that you need to make in order to get there
5. A human adviser will sit with you to interpret the report with you (if you wish to). This would usually last about 2 hours.

In order to come up with this plan, MoneyOwl would need to know your full financial life. You would have to carry out a fact-finding process where you will be asked about your goals, your income & expenses, your assets & liabilities, your investments, your CPF.

And you have to create an account with them. (If they prompt you for the Promo code after you have created an account, the Promo code likely is sent to your email. The email might end up in your Spam folder so do check that!)

That is it.

There may be apprehension in providing so much of your financial life. Some consumers do not give the info of all your assets to their advisers because they are afraid that if they reveal more of what they have, their advisers will force them into an uncomfortable position to commit all of their money to financial products the advisers have for them (more on this perhaps in another post.)

So here is the opportunity to have a comprehensive plan.

1. You pay for a diagnosis of your current financial situation.
2. In return, no product is pushed to you. You will have the freedom to implement on your own, if not MoneyOwl can help with their portfolio solutions.

The kicker is that for a limited time, this comprehensive financial planning is FREE.

Normally, I would show you the process. But this time I thought of just showing you the end product that you will get.

So here are some selected parts of the report.

1. A Summary of Your Income and Expenses

It astounds me how many people do not know in total, how much they earn annually. I think it might be a by-product of auto income tax filling.

If you fill in the information truthfully, the report will show your income & expenses broken down into a few key categories. CPF is separated out, your loan repayments as well.

The objective here is to come up with your Surplus or Shortfall. This is your excess cash flow or free cash flow that you could use to channel into your education or FI goals.

2. Your Net Worth

The net worth is “your financial report card” up to this point. If your financial life is in order, your net worth should be progressing well. If not, we need to find out why…

3. Critical Ratio Analysis

MoneyOwl analyses a few critical ratios that help determine your overall financial wealth. The emergency fund computes how many months of cash you have in the event of an emergency. This guy has 44 months which is about nearly 4 years. My own report shows that I reached 300 months (25 years).

The savings ratio tells you a lot of whether you could be FI. A high one is good. It also means your expenses as a percentage of your income is in control.

The next 3 ratios shows your ability to service your debt and whether you are overleveraged.

4. Where do you wish to get to?

MoneyOwl’s report shows you the financial milestones when they happen and how much you will need.

5. An Assessment of Your Protection Adequacy

What could potentially set you back on your financial goals are health-related events that have a low probability of happening but if they do occur, it would greatly impair your wealth.

MoneyOwl have been doing online insurance evaluation for some time and in their comprehensive report, they assessed your life insurance need, critical illness needs, disability income needs, and health insurance needs.

6. A Summary of Your Investible Assets and Surplus

In this section, the report summarizes based on your current net worth and surplus, how much you could commit to your financial goals.

7. Status for Your Kids’ Education

A big goal for many parents is to provide for their children’s education. MoneyOwl helps you estimate how much you need in the future, and how much you need to fund to achieve those goals today.

In this example, both the children’s education is pretty well funded.

8. Projecting Your Financial Independence Income

What should concern a lot of people is whether they could be financially independent.

MoneyOwl’s approach is to incorporate all the various income streams that you have or could have and provide an assessment of your total income at various pivotal ages.

In this example, at 60, the total income stream would be $9.6k a month, remaining the same at 65 and end off with $4.2k a month.

MoneyOwl factors in your various income sources. You would be able to see different income activation at different stages.

9. Analyzing Your CPF Retirement Income

The challenging part of your CPF is that you do not have an idea with your current assets, how much CPF income you may get at age 65.

Your CPF is also used for various purposes and there are many inflows and outflows. So what is the net effect?

MoneyOwl’s proprietary CPF Analyzer gives you a forecast of the likely income at age 65. It will also show you how much your CPF would have grown to.

This is a big deal because, if you are born in 1978 and below, try to use the CPF Life Estimator from CPF to estimate your future annuity income.

There is a limitation of the age group for those who could successfully use the CPF Life Estimator.

Thus, it is a big upside for this comprehensive planning.

Technology Could Only Do So Much And Why You Need a Client Adviser to Go Through the Report With You

I think the key to MoneyOwl’s comprehensive financial plan is not just the report but how you could pivot your current situation towards your goals.

Your report will show what MoneyOwl thinks is the most appropriate plan for you. By no means should you just blindly carry out what the financial plan tells you.

For example, you may have a different interpretation of the report, compared to MoneyOwl’s adviser. You may also be less aware of the actions that you could take to improve certain aspects of your financial situation.

You might gloss over the insurance protection portion when the adviser may think it is an area we needed to place a higher priority upon. Your surplus rate, together with your future income could be better optimized if the adviser and you discuss the options for certain financial investment commitments that you have now.

By diverting some spending, and investment commitments to investments that fit your time horizon, you might be able to improve your outcome.

After you have received your comprehensive financial plan, you can arrange for a face-to-face review with a MoneyOwl salaried financial adviser.

You can explain certain nuances to the adviser, such as some of your history with other types of investments, why you are less confident to reach your financial goals despite seeing this diagnosis.

The adviser can help clarify any misinterpretations of the report, but also misconceptions about protection planning, financial planning and wealth-building that you have.

The only way to truly own your plan is to get your financial doubt addressed, leave with a connection that these are real numbers provided by yourself, and the action steps are not generic responses to everyone but your very own situations.

The financial adviser then provide a recommended and action plan (REAP Report) of the actual financial changes that you need to take so that you can reach those financial goals.

Fundamental Reasons Why You Should Get A Comprehensive Financial Plan Today

Personally, out of all the offerings by MoneyOwl (Online Will Writing, DIY Insurance Protection, Low-Cost Evidenced Based Portfolio), this is the one that I was most excited about, along with their investments offering.

I think it will prove to be a very useful service, even if you are a very finance savvy reader.

A. Treat the Comprehensive Financial Plan as a Stock Take of Your Current Wealth Position

Many of us routinely pay for a comprehensive health check. We may not like to make the effort to take a blood test, stool & urine test, ECG test. However, we do it because we are concern about our current health situation.

You would make an appointment to meet up face to face with a professional to hear their interpretation of your health report because you want to make sure you are not interpreting it wrongly.

A Comprehensive Financial Plan shows you a diagnosis of your financial life. It shows whether we have been doing things right or not.

Some may be confident and think they have their financial life under control but they did not realize that their current financial management is pretty poor compared to how average people manage their money.

Your financial situation may change and may not change much year on year. Which is similar to your health situation. But if there are some issues, you would like to know about it and get it addressed.

B. Clarify How to Invest & Get That Income Stream with Your Current & Future Net Wealth

Once you have clarified your current financial position, you can then move forward to discuss with the client adviser how best to get the retirement income that you need.

You would have noticed in your financial report the income your net wealth could generate at your desired financial independence age.

What I found out from the client adviser is that clients wish to clarify with advisers how they could realistically achieve that estimated income with their current and future resources.

At the time of writing, the markets are having a sizable correction and this would present an opportunity for you to re-allocate your cash assets at a better valuation to work towards your financial goals.

C. Tell Your Friends Who Are Less Finance Savvy of a Trusted Way to Checkup on their Family Financial Wellness

There will be those of you who feel that some of your friends need to stock take their financial lives.

And you may be equipped to help them since you are savvy enough to do it yourself.

However, you may not have the bandwidth to help. In truth, you understand that this hand-holding can be a lengthy process (read that as years).

Yet, if you would like to delegate and get them professional help, you might struggle to find a firm whose wealth building, financial management philosophy are similar to you.

MoneyOwl is a joint collaboration between Fee-Only Financial Firm Providend Holding and NTUC Enterprise Co-operative Ltd. You may or may not agree with NTUC Enterprise’s mission, but its mission is to address social needs in areas like health and eldercare, childcare, daily essentials, cooked food, and financial services.

You may find that by getting MoneyOwl to help your friends, there may much less probability that this recommendation will go haywire and come back to bite you.

Get Your Comprehensive Financial Plan Today

Given the value I have explained, there should be a cost to this comprehensive financial plan.

Yet at this point, if you sign up, it is FREE.

So what is the downside to this? You have to sign up for a MoneyOwl account and you maintain a relationship with them.

Sign up today to MoneyOwl’s Comprehensive Financial Planning here today.

This is a Sponsored post for MoneyOwl.

Kyith is a salaried employee of Providend. He does not work for MoneyOwl. Providend Ltd holds a 40% stake in MoneyOwl. He receives no affiliate income from any of the links above. Nor does he receives any commission income from any Comprehensive Financial Plan sold.

Here is a sweet and short checklist to how to think about market crashes.

1. Everyone is going to tell you different things. Everyone’s experience is colored by how long they have been in the market. The young investors only seen a 2% fall in 1-day period and they called this a crash. The experience folks saw days of 5-6% fall in the index price in 1 day.

Don’t trust their definition. Be quantitative.

Most of the time the definition people gave matter less.

2. Price falls feels like the start of a large crash or just a small correction or just a blip. The truth is that whether it is a one-day big price fall, a 5-day big price fall, or a 1-month big price fall, this might be

1. At the start of a very poor year
2. The end of a significant correction
3. Just a blip

Markets are positively skewed most of the time.

#2 and #3 are more common than #1.

But a lot of people plan with #1 in mind.

Experience has shown us that we will only know in hindsight. It will be hard for you to base your decision making just on price fall alone.

3. The People that are Most Hurt are the Folks Who do Not Have a Plan, to Begin with, or sold a Pretty Poor Plan. Some wealth builders listen to only part of their friend’s plan, listen fully to their friend’s incomplete plan. They might have a less than refined plan.

They will only discover the plans faulty nature against situations like these. We all cannot have a perfect plan but we just have to strive to improve along the way.

4. Respect both the Financial Plan and the Investment Plan. A lot of wealth builders muddle both of these together and it confuses them. For most of us, we can visualize that we are both a financial adviser and an investment manager rolled into one.

If you cannot segregate the roles and responsibilities between the two, it is going to be a problem.

First, ensure you taken care of the financial planning part.

Have enough liquidity (emergency fund) because you might lose your job for those with equity-like jobs and not bond-like jobs (private high paying and market-linked versus civil servant)

Next, how much volatility that your investments can take is usually linked to how far away are you from your investment goal.

If you would still need a long time to reach where you wish to get to, you can have a lot of equity exposure (which usually comes with a lot of volatility).

However, if you have made your money, it is enough for financial independence, perhaps it is wise to balance equity and bond exposure to reduce the volatility.

I wrote about how traditional equity and bond allocation can keep wealth-builders with different time frames in the game here.

Here is another good article I have written about how to sleep better at night by controlling your equity and bond exposure based on your work income and net worth.

A Metric to Determine Your Maximum Equity Exposure versus your Current Income

5. The People that are Most Hurt are the Folks Who Only Wait for the Correction to Come and Then Invest. These folks usually wait for the correction. When the correction comes, they don’t know what to buy. They don’t dare to buy because this could be the start of a seriously big bear. They can scoop up at better prices.

The slide above is from one of our coaching slide deck to our clients. It shows the length, size, and frequency of the drawdowns on the S&P 500’s 93-year history.

64% of those corrections are between 0 to -5%, last for 1.55 months. 22% are between -5% to -10% and last for 4.41 months on average. Then there are the outliers. But 86% of the time the corrections are less than 10%.

Every correction to these folks feels like those greater than -10%. But they will wait for it to get to -20%.

They will never invest because they didn’t see the slide above.

They will never invest because they will just keep waiting. Most of the time, they will invest at higher prices.

Here is another one (Difference between a crash and a correction)

6. Review Your Existing Holdings to Hold Keepers, Add Gems and Sell Speculations. This point is more for the individual stock investors. The first thing is to make sure that these are the sound companies you would wish to hold going forward.

If not sell it.

Don’t just evaluate based price falls. Everything is going to get ugly at some point. Even great companies.

Do you know how to evaluate your holdings? If not, you are not doing it right. You have not picked up investing & portfolio management competencies.

You need to pick up a lot of books, become a student of fundamental investing.

7. If you have Lump Sums of cash to invest, have a Sound Plan to Invest Over Different Levels of Price Fall. When all this ends, most folks will still be not invested (See #5). They will wait and wait.

Morgan Housel wrote some time ago his plan for such drops. It doesn’t work for everyone but I think it works well after I showed you the magnitude, frequency of price falls.

The idea is that the fall should represent a meaningfully large enough magnitude, but the frequency should not be too rare.

Thus the majority of your money (approximately 60%), if you wish to wait, should be in when the fall is 25%.

The rest should be stagger in some ways such that for each 10% fall, you get invested. A lot of the times, this “the rest” never gets invested (this is a problem. It means a lot will sit on cash unless they get past this psychological hurdle)

The above plan is more for the passive, low-cost, index investors.

8. Know your Investment Plan as an Individual Investor. A lot of investors get very freaky because, in a good market, the volatility tends to look “within your control”. It lures the investors into thinking it is OK to have very large positions.

Some companies have weak fundamentals. When times are good, they aren’t so exposed. But the smart money in these companies KNOW their plan. They are speculating on something short term. When there are signs of trouble the smart money will be out.

You are playing a different game (or for some they have no idea what game they are playing!) and are shocked by the drawdown and not sure what you are doing.

Those with very concentrated positions get very exposed and they do not know whether to hold or to sell. It is a sign of not knowing your game plan beforehand.

When investing in a single company I always have an idea at this point, this single stock or asset is a :

1. Pseudo bond. It is fairly valued and I am keeping for the yield
2. Quality business. Good long term competitive edge and management and a keeper
3. Not so cheap businesses that have a good upside story. This could turned out to be a speculation or might morph into something good
4. Pure speculative.

The decision point for each of these are different. For some of this micro-strategy, it is to hold, to add more. For some is to sell-off.

Before entering an investment, have this in mind.

Two articles I have written which elaborate on this:

1. How to have more Conviction in your Active Stock Investing
2. Execution, Position Sizing, and Financially Irresponsible Stock Positions

9. Let value lead your Individual Stock Evaluation. Individual stock investors should evaluate your companies based on value. Do not fall for the sunk cost fallacy.

A good question to ask is whether if you have not bought your stock, would you buy it today? The answer will let you know the quality of the stock you are holding in your eyes. Of course, there are folks who feel like they should own nothing. Either you do not have adequate competence in evaluation or that the quality of all your stocks are poor.

For all individual stocks, at the end of the day is the price you pay for value. If you are competent to derive the value, you will have a high conviction to hold even if it goes down further. If you are not confident in how you derive value, then you will have low conviction to hold.

Here is an article I have written on Distress Dividend Stock Buying.

This article was first written in Apr 2014.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

When we put our money in fixed deposits or savings account, we can reliably count on that if we put the money in on May 2018 and take it out in May 2020, we will get a certain annualized and cumulative returns.

It is difficult for a person new to investing to visualize their returns when the asset’s value or return is volatile. If you invest in individual stocks, unit trust, or ILPs, the value of your investments change over time.

With this kind of uncertainty, it is no wonder wealth builders stuck to tried and tested forms of investment.

I tried to think back to what convinced me to put my money in the stock markets instead of fixed deposit last time. At the start, I was not particularly convinced when the books showed that if you keep your money from 1929 to 2001, your wealth will compound at a 7-10% a year rate of return.

The time frame was too long and I read that the markets are always known to be uncertain and volatile.

I don’t think I would invest for 70 years. How would it fare in a shorter, but long time frame?

What if I was unlucky to put a huge chunk of my money in a time frame that was unfavorable? Would I regret my decision to take risk instead of putting my money in something else?

I viewed the markets with skepticism even as I was learning to be an individual stock investor.

What greatly convinced me was to look at the historical returns of various past long term periods. These periods are long but not super long. They are more practical and applicable because as new investors, we need to see some results in order to be convinced.

I think 5,7 and 10 years are a good time frame to judge.

The table above was taken from a Providend article I have written this week on Rolling Returns, Conviction and Dimensional Core Equity Fund.

It shows 5 different rolling 10-year periods and they’re corresponding annualized and cumulative returns. We observe that the returns are not fixed. In some 10-year periods, the return can be very good (1991-2000) but most are close to the average.

By reviewing the rolling returns, we gain an appreciation of the range of returns we could get if we are lucky, not lucky, or when our luck is pretty even.

The article goes into more data but I would just like to highlight what is likely to happen as you lived through a 20-year investing period.

The histogram above shows the 1-year return of the Dimensional Core Equity Index from 1990 to 2019. This is a fund that tries to outperform the MSCI World index, so it is rather developed market-focused, very diversified (7000+ stocks), tilted towards value, higher profitability and smaller companies.

Each bar shows a range of returns. For example, there are 53 instances where the returns are between -0.2% to 7.7%.

In this 29 years time frame, if we break them up into months, there are 348 1-year periods. The range of returns varies wildly. The median returns is 11.5% a year. But there are some years where the returns can be negative.

If we stick with the portfolio for 5 years, you will observe the cumulative returns tends to skew towards more positive.

There are still some 5-year periods where your returns are negative. The worse will be that you invest $100,000 and 5 years later it ends up $80,000.

That is not a good feeling.

But you could also have $100,000 becoming $261,000 in 5 years.

If you managed to stick in the fund for 20 years, you can see the range of returns above. Based on this 29-year history, there are 130 20-year periods.

The most unlucky investor got only 4.2% a year annualized return after 20 years. His $100,000 grew to $221,000 in 20 years.

The investor in the middle grew his money to $419,000.

Investing in equities can be uncertain. It depends sometimes on your luck, but it tends to be positively skewed.

For the young accumulator, you can look at this in a different way: Each $12,000 that you put in each year goes through 1 of these 20-year periods. Some of your $12,000 grow at only 4.2% a year. Some $12,000 grow at 8.2% a year.

The volatility of your returns are smoothed over time.

There are data on more different time frames in the article.

Do let me know if this kind of narrative helps you as a new investor or you have other suggestions about what convinced you to put a large chunk of your net worth into something.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

When Eagle Hospitality Trust’s (EHT) share price fell recently, I thought it is a rather good exercise to take a look at how 5 investors will experience the downside.

EHT is a real estate investment trust (REIT) who master leased their assets to their sponsors.

At various price points, it provides the investor with a dividend yield of 8% to 14%, based on their forecasted cash flow guidelines.

When the share price fell, many investors sell. There are also investors who think there is a value somewhere and are buying.

This is, after all, a business model that is not very unfamiliar to many people. It looks like it is fixable in the long term. At the same time, there is uncertainty because it feels like the current true value of the hotels are much less than what was stated in the IPO.

The Experiences of 5 Investors

Suppose we have 5 investors that tried and successfully gotten invested in EHT at different times.

All 5 investors have the same mentality:

1. They think that at the price they buy, there is value. While the time period they are looking at is different, they believe that given the time frame they are looking at, the total return (dividend income received + capital appreciation) will outweigh the prices they are paying now.
2. They all don’t like to lose money. The feeling of seeing their capital in the red kills them.
3. If given the choice they want to protect their downside
4. They all want to get in at the price where it is the lowest

So the price chart of EHT for the past 3 months plus look like this:

The price could go three ways:

1. Up
2. Down
3. Sideways

Depend on the timeframe.

Which Investors Feel the Least Pain?

When we

1. Sell and buy back at a lower price
2. Wait to buy at a lower price
3. Take profit and then try to buy back lower (almost similar to #1)
4. Buy only after a certain plunge

Behavioral wise, we are trying to minimize the pain.

So how did this work out for our investors?

The table shows our 5 investors, who sought to buy at the closest value point, where they will be able to maximize their profits, minimize their downside:

Suppose time suspended today and we take stock of the performance.

At this point, investors 1 to 4 all have unrealized losses:

• Investor 1 lost 35.4%
• Investor 2 lost 31.6%
• Investor 3 lost 29%
• Investor 4 lost 17%

Investor 5 has the best timing and managed to get out a 5.7% return.

Who was the Smart One?

Investor 3 thought he got a good deal.

Looking at the price chart, he got in at $0.655 instead of the high of $0.68.

Investor 2 would argue she got a good deal. Instead of getting it close to IPO at $0.72 she got it at $0.68.

If we were to use some hindsight bias, and we review this way, Investor 4 got the best deal out of those that currently lost money. She got in at not $0.72, not $0.68, not $0.655 but a much, much lower $0.56.

At this point, the smartest is, of course, Investor 5 who managed to end up with a profit.

In the end, the 3 investors after the first one didn’t avoid downside. They still suffered losses.

The Impact may be Different If We Consider the Potential Absolute Losses

What spook most of us with losses is that:

1. We think we are making the biggest mistake of our lives
2. We think we are losing a large part of our net worth and that is irrecoverable

In terms of percentage, the impact might not be as big. But what if we present it in terms of absolute dollars?

Imagine that Investor 1 to 5 invested $100,000.

Investors 1 to 3 have potential losses of nearly $30,000 while Investor 4 has potential losses of $17,000.

To some of you losing $30,000 is a very, very, very big deal and something very distressing. For some of you, this is nothing much.

What if We Layer in Net Worth and Time Horizon?

Suppose I tell you that Investor 1’s net worth is $2 million.

Do you think if you are Investor 1, you can endure an unrealized loss of $-35,417?

I think Investor 1 had an easier time than Investor 3 if we know Investor 3’s net worth is $120,000. With a $-29,000 loss, she almost lost 24% of her net worth.

But Investor 3 will feel less pain if we know that her salary is $80,000 a year and she has 20 years more to retirement.

While this potential loss is large if she can critically think, her savings from her salary over the next 20 years will more than offset this $29,000 of potential loss.

You Need to Learn to Live with Psychological Stress of Being in the Market

We all wish to avoid feeling the pain of seeing our hard earn and previous money vanish in thin air.

But if we use price as the sole indicator in our investment decision making, you might not avoid that painful feeling of seeing your portfolio in a losing position.

In this EHT example, 4 out of the 5 investors suffered the psychological stress of seeing their portfolio in a big losing position.

There is this strategy being passed around that you should only invest in a great bear market. One where the market went down at least 30%.

It is likely they wish to

1. avoid losing money
2. looking like a vegetable head
3. suffering losses to their psychological capital

The math of things tell me that you can’t avoid the pain of seeing large unrealized losses in your portfolio.

You cannot avoid the pain:

1. For those picking the bottom, only a handful would manage to do that. And they do so by luck most of the time
2. For those buying at the bottom, if you see a stock go down from $1.00 to $0.30 and you buy it, don’t feel surprise seeing it go down to $0.15. You avoid a 70% potential loss, only to get into a 50% potential loss.

What is the solution?

Based on what I understand being in the markets this 15 years, there is not much strategy that can make you avoid the pain and still earn a great return.

It means… you need to increase your willingness to take risk by learning to endure this psychological stress.

Long term, you are likely to earn good returns.

The cost is that you need to pay for this by enduring psychological stress.

This is Your Pact with the Devil.

Being a historian of the markets, being a connoisseur of understand behavioral finance can help you cope with the pain of unrealized losses better. It may enable you to retain as much psychological capital as possible.

Lastly, in financial planning, we talk about your ability to take risks. Many pay lip service to it until they take psychological damage from the markets and see their psychological capital depleting at a much faster pace than their financial capital.

I have shown you that your position sizing, relative to your net worth, to your income and how far you are from your wealth accumulation goal, affects how much psychological damage that you may take.

If you are near your goal, your income is going to stop soon, your ability to take risk is much, much lower even though your willingness to take risk is high. If you lose a large part of your capital, it will be very hard to earn them back.

However, if you have a long time horizon, even though you have lost a significant part of your net worth this time around, you learn from this possible mistake. In the next 15 years, you would replenish your capital through savings and if the stock recovers.

Here is a summary of making pain more livable:

1. Understand Your Investment Strategy – It has to be both Fundamentally Sound and Implementable/Applicable to You
2. Not evaluate based on price but based on understanding the business and whether you have a margin of safety in your investment
3. Understand your ability to take risk. This is dependent on your time horizon – how far are you from your wealth accumulation goal
4. Size each position carefully based on
   1. Your Net Wealth
   2. Your Percentage Savings Rate of your Net Salary from Work
5. Be a historian of the markets, being a connoisseur of understand behavioral finance can help you cope with the pain of unrealized losses better

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