I learned a major financial lesson in my mid-20s. I was working in Hong Kong for the president of a major British bank and was making a lot of money investing in emerging markets in my spare time. So much so that I actually became somewhat wealthy within a short period of time. The interesting thing about investing in emerging market ETFs or mutual funds is that they are based on a single or group of countries’ stock market performance. So, unlike a company which can go out of business and you would lose most everything you invested, country stock markets go up and down, but countries typically don’t go bust.
The problem is, though, that markets of any country, including the U.S., can stay down for many, many years when they are hit by a recession, political turmoil, or market crash. So, if you invested toward the top of the market, as we seem to be now in the U.S., and the market crashes again, it could take many years for your investments to go back up to the price you purchased them at. It’s a real risk for all investors, even those who prefer investing in “safer” funds.
In my case back then, I felt so secure in life knowing I had this huge savings. I felt set in life. I no longer had to work at jobs I didn’t like. I was free. Until I wasn’t… the Asian markets I invested in were at all-time peaks, and they made a major correction downward. I was no longer rich. I watched my savings dwindle.
Learn from My Mistakes
The lesson I learned back then, and still practice today: protect your nest egg. What I should have done is take portions of my gains out of the market and put them in less risky investments. Keep some money to “play” in the market, some for longer-term savings.
This is an important lesson to share with Brains Members, because you are around the same age I was, and are learning to invest. We are also in a very strange and unprecedented time in the world with the Covid-19 crisis, and the resulting instability of our global economies and markets. If you invested toward the bottom of our recent market crash, you would be up 30+% now. What a great return! But there are many notable economists who believe that, due to the Covid-19 crisis, the world economies have many years to recover, and the current high stock markets are not representative of the true underlying economic conditions.
Sometimes it’s better to have less than to make more… because the risk to make more could jeopardize your entire nest egg. If markets crash and you are invested in stocks and funds which tend to mimic the overall economy and stock market, your investments go down accordingly.
Unfortunately, we just witnessed a very difficult period in our history where millions of Americans were laid off from their jobs, and many had such low savings that they had difficulty paying their rent, car payments, and buying food. This is why it is crucial that you have a solid nest egg for emergencies. The respected financial advisor, Suze Orman, recommends that everyone have 8-12 months of emergency savings. Others think that many months may be too many, but realistically it can take time to find a new job and get back on your feet.
What You Need Right Now – and Later
I differ from many other investment advisors in what I consider good sources for emergency funds, however. Typically experts suggest these funds are kept in easy-to-access vehicles like CDs or bank savings accounts. But the point really is that you should have access to fast cash if you need it, which could include family members who are willing to help out in emergencies. When you’re younger, your parents could fill part of this role, but as you start building your investment portfolio over time, you can start putting aside extra funds from your investments in less risky instruments, building up your own emergency fund. Real estate, cars, and jewelry are not good for an emergency fund because they take too much time to sell.
Brains is about investing for the long term, and has fund options for turbulent markets like we are experiencing today. For example, our Recession Fund consists of companies which tend to perform well in difficult economic times, like Amazon and Walmart. And our Money Market fund is diversified across a handful of U.S. Treasury ETFs, which are typically less risky (but also offer lower returns, in general).