Source: http://aqwwiki.wikidot.com/bucket-o-gold
… Or so a very famous investor once said. For anyone who’s been following the recent market turmoil, last week presented a great buying opportunity. Beating the Index has a great post up on why the market was in turmoil and what he sees ahead. It turns out that Chicken Little was wrong yet again, and the sky didn’t fall down after all.
Market timing and luck
I do not believe in market timing nor do I believe in luck as a supernatural force, but I do believe that there are opportunities that come and that luck is in part a function of taking action upon these opportunities. There was always the risk that Germany and the ECB could tell Greece to pull themselves up by their own bootstraps, but the order of the day seems to be that moral hazard is preferable to a collapsing line of dominoes.
The importance of liquidity
So, did I take my own advice and invest when it was “raining gold”, so to speak? Nope! Unfortunately, in order to capitalize on opportunities, one needs liquidity; one needs cash to be able to invest! My cash is currently all tied away for a downpayment fund. It would take too long to transfer this money into an investment account; the opportunity would already be gone.
I also prefer to buy and hold for a decent amount of time, and I wouldn’t be able to do that if I used part of my downpayment, since I need that money for the downpayment itself! In fact, I am currently in the process of liquidating most of my unregistered investments in order to use them toward the downpayment. I wouldn’t do that if I had the funds available to me, but we have made a lifestyle choice to purchase a home rather than continuing to rent.
I don’t feel too sorry about liquidating these investments since they are in bank indexed mutual funds, which still have a relatively high expense ratio which kills returns over the long haul, and I’ve had a good recovery with them over the last year. I will have to calculate and see what my overall return is, but I don’t think it is terrible.
Lessons learned
So, what lessons have I learned? Liquidity is important. I don’t currently have any lines of credit other than a RRSP line of credit which I have never needed to use; I am now currently considering opening up a general line of credit so that I can capitalize on opportunities in the future. Consumer debt is to be avoided, but debt for investment purposes is not always bad. It is going underwater (a net worth less than $0) that is to be strongly avoided.
So, how about you? How have you been affected by the recent market turmoil? Did you also keep Warren Buffett’s old adage in mind? I’d like to hear about your stories. The fat lady hasn’t finished singing, and a new correction could ensue that will make me eat my words. 🙂
hi Kevin,
This pretty sums it up : Consumer debt is to be avoided, but debt for investment purposes is not always bad. It is going underwater (a net worth less than $0) that is to be strongly avoided.
I’m currently looking of going into the debt for investment category. You’ll be hearing more about it soon.
Mich
Hey Kevin,
Our philosophy during times of market turmoil is to only invest in companies that you know can make it. We invest in companies where if their stock price went to $0.00 then that means that the economy is toasted, and if the economy is toasted then so is the currency, so either way you’d be left with pockets turned out. Congratulations on the house by the way!
Thanks,
Timothy
Wealth Artisan Team Member
Hey Kevin,
Personally, I’m hoping for a market crash. At 40 (yikes, I just turned 40, and nearly wrote 39!) I can afford to see a market dump. I’d sell some of my bonds, as I did in 2009 when presented with mouth watering equity prices. That was a beauty. I tend to do that when the markets take a very significant dump (2001) (2003) (2008/2009) and during bull markets, I build my bond percentage back. Currently, I’m sitting at about 37% short term bonds. So I’m ready and keen to see a crash. It might sound selfish, but as they say in golf, “every putt makes someone happy” The extreme volatility of the markets over the past 10 years has made it very easy to rebalance and easily beat a 100% equity index–while enjoying a large bond component that adds safety, stability…..and dry powder when the opportunity presents itself.
@Mich
Great, I’m looking forward to reading about it!
@The Wealth Artisan
There is always the risk of an Enron happening 😉 I do grant that for long-established companies that this risk is quite low. The way I handle risk is that I try to be optimistic while still having a contingency plan in case something bad happens. If something *god-awful* happens (let’s say a nuclear explosion in a major north american city or something on that scale), then I know that my money isn’t going to matter much but survival will. I don’t worry about the stock market going to 0 because I know that if it does happen, nothing is going to save me other than my own ability to not get killed by whatever happens then. Pretty grim to think about, but I don’t think the odds are so likely that it’s worth worrying about. I could get run over by a car, a concrete block could fall on my head… there are risks every day in life that we face by the simple fact of being alive.
@Andrew
Wait until I finish liquidating my funds, THEN we can have a crash 😛 I need to learn more about bond investing; it’s not something I’ve done much of up till now.
Bond investing is a piece of cake Kevin. Buy a short term government bond index and a short term Triple A rated corporate index. Done!