The world has been plunged into chaos and uncertainty this week after Russian president Vladimir Putin gave the go-ahead for troops to invade its neighbour Ukraine.
Any loss of life is tragic and finances should not be the first thought in such a situation, but many investors will have been panicked by the market reaction to the news, with all major stock markets selling off.
One note that crossed my desk caught my eye. Brian Dennehy, managing director at Dennehy, Weller & Co , recommended that investors sell up to 50% of their investments into cash as the news broke.
It is part of his plan for dealing with market meltdowns, of which the current situation certainly qualifies. Indeed, he said the ‘Blitzkrieg’ situation currently playing out in Ukraine could lead to market falls of 50% or more.
First, he recommended investors question their attitude to risk. After a nearly 40-year bull run, it is easy to get complacent, but there are some key things to think about that many have not had to contend with before.
Investors should therefore accept the possibility that markets will go down more than their life plans or savings goals will allow. It is impossible to know if or when this will happen, but understanding it can is a key first step. The next step is how to deal with falling investments.
One way to do this is to reduce the number of holdings to a maximum of 15, but lower if possible. “The more holdings you have, the harder you will find it to take action when markets fall,” he said.
Applying the “overnight test” is a good way to do this. Simply assume that you moved 100% into cash overnight and in the morning had to re-allocate your money – how much would you put in the same investments and would there be any that you did not bother with?
Sizing is also an issue. No investment should be less than 5% of your overall portfolio, he argued as anything smaller will have little-to-no real impact on your returns.
Lastly, Dennehy suggesting having a stop-loss strategy in place, which will forcibly sell any holdings that go below a certain level. This can either be done manually – as long as it is stuck to – or automatically.
“There is no perfect answer, but an effective level appears to be 10%,” he said, as anything under this can lead to making lots of trades, particularly in volatile markets, while anything above this may prove too painful.
His final piece of advice is to avoid holidays, as it is a mistake to be out of contact with markets if you have large investments and to know when your broker trades. “If they trade funds at 8.30am and you ring at 9.00am, you are already 24-48 hours behind market prices,” he said.
This plan seems sensible to me, particularly if you fall into one of two camps: those that live off their savings, or those that actively trade.
For those that are more long term, such as myself. I am not likely to move 50% into cash, but there are still things to take away.
For example, I have been tempted to look at my portfolio this week, even though I know it is a bad idea in the long run. A stop-loss might put my mind at ease as it will limit my losses – although I would need to have a closer eye on reinvesting the money.