I thought we would have a bit less-structured discussion today around the topic of building a good defense for your finances.
What is \”Defense\”?
Defense is protecting yourself against loss by building reserves, paying off debt, redistributing assets, or even having proper insurance buffers in place. People often see those who are misers, frugal, or defense-minded as pensive, overly cautious, and probably living a bit of a boring life.
Now, I believe there is always a healthy balance between taking ground by being offense-minded and ensuring that you protect what you\’ve built. Neither approach should be dismissed, no matter what the market conditions tell you.
Having a good defense is more than just building a budget or a plan to spend, having adequate reserves, or ensuring you are adequately insured. It also includes knowing your risk tolerance, what you\’re comfortable investing in, and being a realist by knowing where we are generally in the economic cycle.
Whether it\’s what the media feeds us or having access to an abundance of information, a lot is feeding us fear these days.
We are far too concerned with what everyone is doing, except ourselves–especially with our money. It\’s important to know why you do what you do to ensure that your position with a matter is not dependent on someone else\’s opinion. It\’s never a good thing to follow someone else\’s faith or beliefs, financial decisions, relationship advice, or matters of health just because it\’s coming from someone you trust. You need to have your own views.
I have seen this play out so many times when content producers discuss their reasoning for selling in this market. For example, a personality who recently made a significant shift in investing was Kevin Paffrath, most notably known for his YouTube channel, Meet Kevin. Recently, he sold 99% of his stock portfolio, anticipating better buying opportunities coming. However, he received a lot of backlash for this decision. Whether those thoughts and emotions were justified or not, we have to keep in mind that this is his portfolio, his threshold of risk tolerance, and ultimately his belief for where the market is heading. We can so quickly jump to criticize others\’ decisions without considering these aspects.
Know Your Parameters
No matter who you are and how extensive your portfolio is, it\’s essential to know the parameters for your money. Without parameters or boundaries, you will be enticed to buy when there is a frenzy and sell when there is fear. These boundaries ensure that you don\’t do that and act from an emotional state. On the contrary, you will make wiser decisions for your money in a logical state before there is either frenzy or fear to influence you.
Whether you believe that the market has a greater risk of downward pressure or a more significant gain of upward movement, you must build your plan or portfolio based upon what you are willing to have on the line. Too often, I have allowed fear to dictate making moves in the market, so I\’m speaking just as much, if not more, to myself in this manner than even providing advice to you.
Will the growth value continue on an upward path?
People have been operating with a euphoric mindset for years now. Other than the blip in 2020, we have been operating with strong growth since the great recession, meaning that we\’ve experienced 10+ years of growth. This development has led many to believe that it will always be this way. However, this is when it gets dangerous because it leads others to grow too comfortable and to believe there is a slight possibility of a downward swing due to how things have performed recently. There is a recency bias of what things cost and investors\’ sentiment that predicts this trend will continue.
Now, the market is cyclical, period. Whether you are bullish or bearish right now, know why. Make sure that you act with conviction, not just because your Uber driver told you to buy or sell, but because you have applied the time, energy, and confidence to what you believe the market is doing or will do.
Growth in Prices
Over the last year or so, we have experienced incredible growth in prices. There\’s been a euphoric growth in stocks, home values, vehicles, to name a few, due to people\’s spending behaviors based upon a continual expectant growth in values in the future. Although there are arguments over whether prices will stay high due to inflation, I believe that there is more of a risk for the value of things to drop than the potential for an upward gain. Because I am more cautious and frugal in my thinking, I\’ve applied this perspective to much of my investments to hedge against this.
Is it a good time to pivot?
I agree with Meet Kevin that although you cannot precisely time the market, you can have a good idea of knowing the times in which we are in, for the most part. I have slowly unloaded assets that I believed were reaching their peak valuations in the past year. One of my first steps was pivoting my stocks and index funds to lower-risk investments. Then I sold off my investment real estate and my primary residence, which I probably should have held onto for just a little longer due to the massive gains in even the last 8-12 months.
But again, there was no way of knowing the ideal time to sell. Since then, I have carefully assessed other assets like vehicles and defense like insurance policies since being defensive-minded is a long game. Knowing where we are from the financial standpoint, your portfolio, and risk tolerance are all things you should factor into your investment decisions.
What can I do now?
I would challenge you to examine your defense. Is it strong? Have you retired debt, built reserves, and worked to protect this aspect of your finances? Start with looking at your most significant assets and how susceptible you believe they are to downward pressure in the months or years to come. Then see how long your reserves could support your current lifestyle. Once you have looked at these factors, consider how exposed you want your risk tolerance to be. This should be a standard practice we all continually go through to ensure that we are balanced and not placing all our eggs in one or just a few baskets.
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