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youngmoneyadviser q&a

Question from a young investor: “I just started investing two years ago. I’m freaking out about what’s going on right now. Should I sell everything?”

Answer from Darryl Brown, an independent investment consultant and founder of You&Yours Financial in Toronto.

Darryl Brown, investment planner and founder of You&Yours Financial in Toronto.Handout/Handout

I know it feels like the sky is falling. And honestly, there are some pretty big cracks up there right now. But freaking out, much like hoarding toilet paper, will do nothing to help.

Instead, let’s answer the following questions to determine if it’s time to sell:

1. Do you have an emergency fund?

An emergency fund is six months worth of your required living expenses. It is essential and a best practice for everyone before they start investing. Given the current situation, I recommend increasing this amount beyond six months if possible. This money should be in a high-interest savings account or cash in a TFSA. You want it liquid and accessible. If you do not have an emergency fund, you should sell off enough investments to establish one.

2. Is your budget still the same now as it was six months ago?

Reduced hours and closures are affecting a lot of us, especially hourly employees and small-business owners. Working from home and having the kids out of school can also impact our spending habits (and sanity), so revisit your budget with the assumption that things will be like this for a while. If you have major changes or gaps you need to supplement with investment money, then you may need to sell enough to do so.

3. Are you investing for the long term?

I see far too many young people investing to fund short-term goals, defined as goals less than five years off. I don’t recommend this at the best of times. If you need your money in the next five years, pull it out of the stock market. As a rule, investing is for long-term goals, saving is for short-term goals.

4. Is your asset allocation aligned with your age and risk tolerance?

Asset-allocation is how your portfolio is split between stocks – riskier, with higher returns – and bonds – safer, with lower returns. Usually, the younger you are, the longer you are investing for and thus, the riskier you can be withstanding market fluctuations over time. Older folks approaching retirement or on a fixed income have less time to ride out fluctuations and need safer, more predictable returns.

An easy way to calculate an appropriate asset allocation is the ‘100-minus-your-age rule’. If you’re 30, it’s appropriate for your portfolio to be made up of about 70-per-cent stocks, and 30-per-cent bonds. It’s common for investors to be over-exposed in stocks, especially those looking for higher returns. If this is the case, sell some stocks and buy bonds to bring it in line with the aforementioned rule and balance your risk.

If you’ve answered no to any of the above questions, you need to sell at least some of your investments. Locking down the above points should be your top priority. If you answered yes to all the above, you do not need to make any material changes.

I’m like a broken record player when it comes to the importance of investing appropriately and creating an Investment Policy Statement (which is like an investing plan) and times like this are exactly why.

We can expect a lot of volatility in the months ahead as our economy adjusts, but if you’ve invested appropriately, this is part of the deal. We have to take the downs with the ups. Stay home, take good care of yourself and – I cannot stress this point enough – do not check your portfolio everyday.