5 Rules Of Thumb For Investing In Uncertain Times
2021 put investors on a rollercoaster ride between highs, lows, and the uncertain role inflation may play in 2022 and beyond. The stock market recovered from a tumultuous 2020, although there are signs of trouble ahead as supply chain disruptions could impact markets.
The Bitcoin boom hit snags in 2021 as well. There was a Bitcoin sell-off during the summer, followed by an autumn surge. But as we close out the year, it looks like Bitcoin prices are taking another precipitous drop. The dawn of non-fungible tokens (NFTs) took root as well. High-profile NFTs sold for $24.4 million at auction this past September, which was enough to grab the attention of art buyers and crypto enthusiasts (and even mainstream investors). Whether or not NFTs are truly here to stay, however, is unclear.
While it’s impossible to predict what investors might face in 2022, many of the same rules of investing that have helped investors weather challenges in the past still apply today—even if the kinds of investments available are radically different.
Here are five 'rules of thumb' for investing when uncertainty abounds.
1. Set Your Goals
No matter what you decide to invest in, your goals should still help guide you through how you build and maintain your portfolio. The underlying assets you own may change, but your goals should have some amount of permanence. Retirement might be one goal; another might be buying a house or paying for a child’s education. How you decide to reach these goals can change as the market changes, but your intention can help you pick the right investment opportunities.
Goals-based investing is a time-honored practice. When you set a fixed goal for your investments, you can then pick the assets (and their allocation) that will best prepare you to reach them. This may sound simplistic, but a goals-based approach can help you see the big picture when markets are unstable.
A goals-based approach helps you look at the long-term, rather than short-term market losses. This strategy eschews the common strategy of growing investments year on year as the main goal. Rather, it looks at your long-term, multi-year goals as the focus of your investing efforts. Hitting these goals—even if you sustain losses along the way—is the focus.
For example, if you lose 10% of your portfolio’s value in a year where markets drop by 40%, non-goals-based investing would mean that any loss is intolerable—even if you’ve actually beat the markets. A goals-based approach would be more accepting of a short-term loss so long as you’re still on track to save for retirement or other financial milestones.
Goals-based investing can be a great approach when markets are unsteady. Investors who have time before they need to cash out can often afford to stomach short-term market volatility so long as they maintain the view that markets tend to increase in value over time. One year’s loss, therefore, usually doesn’t make a massive difference. So long as you’re investing based on the timeline of your goals, and adjusting your portfolio allocation based on yearly milestones, you likely have less reason to worry about temporary shortfalls.
2. Slow & Steady Wins The Race
For most investors, you can’t expect to make significant returns overnight. While it may be challenging to take a “set it and forget it” approach, there are often distinct advantages in being patient and thinking long-term. This can be especially true when markets are volatile and the urge to change your strategy becomes hard to ignore. In most cases, however, it's not the time to switch things up.
Here’s one sample of funds and blue-chip stocks versus the Dow Jones Industrial Average and the S&P 500 since 2011. There have been dips along the way, but ultimately each asset increased in value versus these two major indices.
Source: Yahoo! Finance
You’re often better off keeping your asset allocation, particularly if you’re in no hurry to withdraw your money from the market. So far this approach carries water for newer investment types, such as Bitcoin and Ethereum cryptocurrencies. Although both have experienced major value swings, they have still risen on average since their inception.
Source: Yahoo! Finance
If you held onto either of these currencies since 2015, weathering the 2019 crash, you’d likely be sitting on sizable gains today. Even if you entered crypto later on, it's likely you'd be up so long as you bought and held your position.
Having the discipline to stay the course can be critical to your long-term investment strategy, particularly when market volatility and fear could cause you to second-guess your careful investment decisions.
3. You Can’t Avoid Risk, But There Are Ways To Manage It
Every investment comes with some amount of risk. You’re bound to experience volatility and, to varying degrees, the potential loss of some or all of your investment’s value. Your appetite for risk, as well as the strategies you use to mitigate risk, can help build resilience into your portfolio. This can offset some of your portfolio’s exposure while also positioning you to seize new investment opportunities.
Having your portfolio in only one or two stocks is usually unsafe, no matter how well they’ve performed for you. On the other hand, investing a majority of your portfolio in traditional “safe” assets, such as bonds, can sacrifice your long-term returns. Playing it safe doesn’t necessarily help you build value, but being too aggressive can leave you overexposed.
What, then, can you do to embrace the right amount of risk? The answer might include hedging against your most volatile assets. For example, your stock investments carry significant risk—that’s why most investors offset some of this risk with either investment funds or bonds (or, in most cases, a combination of the two). This can serve as a hedge against losses from your stock positions: your less risky investments can help you earn returns that offset the potential loss of value within your stock positions.
You can also hedge against risk through investment opportunities that aren’t necessarily no-risk-no-reward assets. Although these predominate in the world of conventional investments, the realm of alternative assets can provide you with much greater flexibility to earn market-beating returns with less risk.
Farmland investing, for example, can offer long-term growth with returns that have historically beat the stock and bond markets. Plus there’s a longstanding track record of stable, steady appreciation for farmland value spanning back to the 1990s.
This means your investing dollar can be more likely to grow even though your risk level remains low—something conventional investments can’t necessarily match.
4. Avoid FOMO
The fear of missing out on a hot new investment opportunity or skyrocketing prices can be hard to ignore. These investments may be popular, but this popularity doesn’t always mean that they will make a great return on investment. In many cases, this may lead you to “buy high and sell low,” which can be a recipe for losses and frustration.
In most cases, the opportunity to invest in the next hot asset has already passed by the time you hear about it in the news. Take for example the rise of GameStop and other Reddit-adored “meme stocks.” If you bought GameStop by the time the nightly news covered the buying frenzy observed in January 2021 when it hit its top share price of $347.51, you’d likely still lose on your investment today as prices have not come near this high since.
Instead of chasing the flavor of the day, look for investment opportunities with growth potential. Value investing is one strategy you can use to scout out low-priced assets that are well-positioned for growth. These may take the form of dividend-paying stocks or those with ideal price-to-earnings ratios, which is the share price versus its earnings per share. Other investment types, such as farmland, can also offer long-term value by way of their anticipated rates of return.
Take for example the volatility of GameStop stock versus Apple and Berkshire Hathaway—two stocks considered to be valuable investments to most experts:
Source: Yahoo! Finance
Although you might have made a comparative fortune buying GameStop in November 2020 and selling at any point so far in 2021, the odds of you having done so without first hearing the hype are low. If you’d taken that investment and put it behind Apple or Berkshire Hathaway, you’d likely be in a much stronger position to see a solid return through these two less-discussed holdings.
You may not get rich overnight with farmland or value stocks, but you may better position yourself for more stable, affordable growth with less risk of falling prey to trendy assets with little room to grow.
5. Invest In What You Believe In
Thanks to the rise of fintech platforms, investors today have access to hundreds of asset types and stocks that were previously out of reach. More importantly, investors have the chance to use their dollars to drive impact for the causes they care about.
It’s often best to invest in what you know—not understanding the industry you have a stake in can lead to missing out on crucial details. On the other hand, you may stand to benefit significantly by investing in areas you care about. This is particularly true for Environmental, Social, and Governance (ESG) investing. Many companies and industries with ESG at their core have outperformed market indices in the past few years. This means you’re not just investing based on your conscience, you’re also investing in a slate of opportunities that stand to beat the markets as well.
If you’re interested in sustainability, there are plenty of options out there. Farmland investing is among the best around, providing you with an opportunity to use your dollars to drive agriculture towards sustainability while benefiting your portfolio given farmland's history of strong and stable returns.
FarmTogether provides a range of farmland investment opportunities that help transform farms into sustainable food sources of the future. Our mission is to bring creative and transformative capital to farming while opening up a vital asset class to investors. We hand-select opportunities with this mission in mind.
Interested in learning more about farmland as an asset class or FarmTogether's commitment to funding sustainable and prosperous farming? Check out Why Farmland, Sustainable Agriculture, or get started today by visiting Ways to Invest.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.