Can you imagine how is it like to lose all your cash overnight?
Can you imagine how is it like to be under the constant burden of debt?
Can you imagine how is it like to fear losing even more money?
That was exactly how I felt about 2 years ago.
After the market took a breather from the Lehman Brother’s collapse, I went back into the stock market under the encouragement of my remisier.
I made some gains, it felt good. I put more money into the stock market and I made some more money.
At this point in time, my remisier introduced me to the concept of trading in margins account. To put it simply, using stocks or cash as form of collateral, you are able to borrow funds to buy shares. If the market is good, and your bucket of stocks goes up, you can sell the stocks and take the profits. The brokerage firm takes the interest, brokerage fees and the principal from the sales of the stocks. To control the exposure, the brokerage firm sets a market value to debt buffer, once the market value of your stocks goes down, you need to top with cash or sell the stocks, take the loss to reduce the debt.
I wasn’t very keen but my remisier was very insistent. I signed up on this scheme. I started making gains, and I increased the borrowed stockholdings under the remisier’s recommendation.
Then the European Sovereign Debt Crisis arises, stocks prices tumbled. Market value of my stocks depreciated sharply against the debt that I was exposed to. I had around 40K in cash in my account at that point in time, money which I built over the years, and it dissipated in a month, as I topped up my margin account. At the lowest point, I had only 2K in cash.
Every night, I was frightened that I might have to top up the margin account with money, money that I did not have.
Its 2013, the market has recovered (although not enough for me to sell off), my cash holdings have increased back pre-crisis level.
As I looked back, this are the lessons learnt:
My instincts tells me the margin account wasn’t a good idea but I went ahead nonetheless.
I could have listened to my fears, question it and find out what it was trying to warn me. But no, I played with money I did not have and burnt myself. I burnt myself bad.
But what could I have done with this fear of losing money or even missing out of gains?
I found out this morning, while reading the papers.
Carl Richards, a financial planner from the US wrote about the investment policy statement in the New York Times.
According to Carl, the investment policy should cover the following questions:
1. Why are you investing in the first place?
2. How much do you need in cash, bonds and stocks to give the best chance of meeting these goals, while taking the least amount of risk?
3. What actual investments will you buy to populate the plan and why?
4. How often will you revisit this plan to make sure that you are doing what you said you would do, and make changes to investments to get them back with what you said in the second point?
The personal investment policy statement can be one the most important guardrails against the passivity, inactivity or even over aggressiveness that is driven by fear over money. Be it fear over loss of money or fear over not gaining enough money.
Once again listen to our fear over money, question it and develop the investment policy statement. May it help you in your investment decisions.
Your fellow human being:)