What to do with your money in uncertain times?

ONE of the biggest challenges of investing is dealing with uncertainty and fluctuations in the market. China's strict covid-19 policy and the pressing situation in Ukraine are this year's captains of uncertainty. Resulting in inflation, rising interest rates and increased food and fuel prices.

You notice those consequences in society and in the global stock market. The MSCI All Country World Index(MSCI ACWI Index) is an indicator of the global market. With stocks in both developed and emerging markets. Since this year (YTD), the index has fallen ~16%. Reason enough for investors to wonder what best to do with available and invested capital. What do you do with money in your (investment) account now?

Rest assured. The economic uncertainty now gripping the world is, in a sense, nothing new. There have been several financial crises in the past.

Such a downward movement of the market is part of what investors call a "market cycle. A period that usually lasts five to seven years and consists of an up and down movement of the market. Although it is not clear in advance exactly how long the cycle lasts. Past experience shows that there is light at the end of the tunnel. So perseverance is important in uncertain times. But how does that work?

Periodic contributions pay off

Look at the last three major crises through the lens of the MSCI ACWI Index mentioned earlier. The Dot.com bubble, Financial and Corona crises have something in common. The performance over a period of 1 to 3 years, are miraculous.

People who were able to continue to invest during such a tough period - when the markets collapsed. Saw, in a relatively short period of time, a substantial increase in the value of their investments. According to research, contributing to your investments periodically (for 6 to 12 months) during a crisis works better than investing once when things are going well. This is best done with a solid plan.

It always starts with a plan

"What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework." - Warren Buffet

What the world-renowned investor and CEO of Berkshire Hathaway means is simple. Successful investing starts with the right plan of action. Such a plan has two parts.

🧭 A strategy that defines how you achieve long-term goals and what your approach is in different situations. This helps you stay disciplined in times like these. So that emotions don't throw a spanner in the works of your goals and you get off (too quickly) or lock in your losses.

🧇 A portfolio that matches your goals and strategy. This is a distribution of different types of investments, such as stocks, bonds and cash. Of which you adjust (rebalance) the composition as needed. By rebalancing, you adjust the portfolio to market conditions in order to take more or less risk (temporarily) and thus protect your assets or increase the probability of return.

In short. To invest in uncertain times - so that you achieve long-term goals - you need a plan. With a strategy and proper portfolio composition. So that you are less sensitive to the market and your emotions. Because even though it doesn't feel like it right now. There is light at the end of the tunnel even in this crisis.

Diversification protects wealth

Composing your plan's portfolio is done by diversification. This is a tactic to manage (investment) risk by creating a mix of different investments in a portfolio. Instead of concentrating your assets in one company, stock, sector or industry, it is wise to diversify your investments as much as possible. Across different companies, industries and "asset classes. An asset class is nothing more than a type of investment such as stocks or bonds. But can also be real estate or crypto.

Spreading works to your advantage because then investments don't all develop the same way over time. Take a look at this figure.

You can see that during the lesser periods, when stock (equity) returns were quite lousy, the performance of other asset classes was significantly better. Looking at the table below, you can see that this principle holds even during the three major (financial) crises. If your portfolio at that time consisted of a good mix of equity and bond funds, you had flatly lost less money than if you had only invested in equity.

Moreover, as an added benefit, by spreading you had more capital to deploy once the (stock) markets improved again. Despite the obvious not to bet on one horse - this remains an insight that many people overlook.

Do you already have a well-diversified portfolio at a time of many market fluctuations? If so, it may be smart to rebalance your portfolio so that the risk of your portfolio matches your goals.

Why not leave money in the bank?

An open door: inflation is rapidly making everything more expensive. As you can see in the table below and already know, the savings rate in the Netherlands still hasn't really moved.

That means tough weather for the money sitting in your bank if you do nothing with it. In the financial market, this is called "negative real returns. This means that by not investing or substantially increasing your income, you run the risk of not being able to keep living the same way. You will then have to adjust your lifestyle by, for example, spending less or saving on vacations, energy costs, etc. Simply because your money becomes worth less and at the same time the return on your money is too low to absorb that.

People therefore divide their wealth into different installments and goals. But instead of different savings pots, they use the division to make parts of their wealth pay off. That's smart wealth distribution. A few tips:

☂️ A financial buffer is the starting point. Your buffer will cover about 6 months of your living expenses. You decide how critical it is and put this money in an account you can easily access.

🧦 Invest in stocks only with money you don't expect to spend in the next five years. Make sure you set goals for your plan that will take five years or longer such as a study, sabbatical or perhaps retirement or world travel.

🏠 Buying a house in the future is a possible exception to your five-year rule for investing. That's because there is increasing similarity between stock and housing markets. So it may pay off to start a plan for a house in advance and use this money to buy in the future. Even if this is within the five-year rule.

So what should I do?

If you are considering starting to invest, have money besides your buffer that you can spare or have sold some of your crypto, you could use that capital to build a diversified portfolio incrementally (periodically) over the next 6-12 months. Keep the following things in mind as you start making a plan:

1. Make sure you have a long investment horizon.
   That way you don't have to worry about a bad week, month or even year.
   
2. Once every six months, evaluate your goals.
   Are you still on track to meet your goals or determine what you want to do with new savings.
   
3. Manage your risk so that it does not control you.
   Create calm and focus by determining in advance how much risk you can take to meet your goal.
   
4. Put together a diversified portfolio.
   Determine the type of investments to invest diversified (and sustainable, for example).

Vive helps you invest for the future

No knowledge, time or desire to create your own plan. But ready to invest? With Vive, you can create an investment plan for free. For every goal you have, you can make a plan in a few minutes. So that you achieve that goal in the best way possible. Compare it to a car navigation that knows the best way to get to your destination. That plan is completely tailored to your financial situation, the market and your goals. In our opinion, the best way to build wealth for later. You decide afterward whether we'll implement it for you and keep it updated.

Your plan advisor

With Vive, you get access to unique wealth management features like the plan advisor that provides tips to improve your plans. Our plan advisor provides real-time insight into how your plans are doing and whether you need to make adjustments to reach your goal. Or if the markets are not performing as expected.

Because your plans are monitored, you also don't have to do the rebalancing yourself. As an asset manager, Vive keeps an eye on your plans day and night and makes sure the necessary actions are taken to keep you on track. Ay ay captain!

What does the World Cup have to do with this?

If we have learned anything from the soccer matches at the World Cup in Qatar, it is that the outcome can be totally different from the expectation. Predicting events or the outcome cannot be done. In the end, the best strategy is to make a plan and ensure good diversification of your investments. That way you will win all the matches in the end.

🌱

Good to know

Expressions of Vive are compiled to inform and entertain. The content should not be considered financial advice. Do not take unnecessary risks and always read essential investor information in advance. Investing involves risks.