How Young Investors Can Thrive in Turbulent Times


Young Investors

By Ziad Hijazi
04.07.2020
Investment Advisor Representative
Email: ziad@gerberkawasaki.com
LinkedIn: ziad-hijazi-4b6119121

I want to start this article by saying that I hope everyone is staying healthy and positive during these trying times. I remember a phone conversation I had just a few weeks ago with a friend, talking about how blown out of proportion the reactions to COVID-19 were.

It's just another flu, right?
It's not like anyone in LA is at risk.
I'm young anyways, I'm not going to be affected by this.


Those naïve beliefs were quickly dispelled as the entire city, the state, then, seemingly, the world was self-quarantined at home. Conversations have shifted from asking how the weekend was to what new hobbies have you picked up at home or how much toilet paper do you have left.

As businesses are forced to close, millions are being laid off, causing unemployment numbers to skyrocket. Honestly, it's felt overwhelming, having our society adjust to a new normal for at least the next couple of months.

However, the world isn't stopping.

People continue to work, albeit at home. Happy hours, yoga sessions, even EDC raves are all being held over videoconference. We've seen communities come together to donate supplies to those who are in dire need and show appreciation to the heroes on the frontlines and those who are working tirelessly in hospitals to treat people who have fallen ill.

As financial advisors, our minds immediately shift towards the investment landscape, with the stock market undergoing its sharpest drop in market history. This has been the quickest shift ever from all-time highs to into bear market territory (20% decrease from the peak). I celebrated my first birthday as a financial advisor with the Dow Jones Industrial Average reporting its second-worst trading day since its existence. People have understandably been very concerned, as they look at their portfolios drop in value.

These are no doubt difficult times, and with that, I wanted to share my younger perspective on what I have been doing to stay positive about my finances and make sure that I come out in a stronger financial position than before.

Having a Cushion and Continuing to Save

One of the most essential parts of any financial plan is having a liquid Emergency Fund. I've saved about 3 months of my living expenses in the bank, which is on the lower end of our recommended 3-6 months of expenses saved. That Emergency Fund is meant specifically for times like these. Millions of people are losing their jobs, but they still have to pay the bills, and having that cushion in the bank provides for a much easier transition through these times. Maintaining a solid Emergency Fund is the foundation that allows you to feel much more comfortable with the rest of your financial plan.

If you haven't reached that threshold in the bank, take advantage of this time to boost your savings! As we continue to work from home, there's considerably less to spend on, which allows us to shore up our finances with those increased savings. Beyond my Emergency Fund, I'm taking my additional savings and investing it. The most important thing with investing and one of the hardest things to do especially in times like these is…


Maintaining Perspective and Staying Invested

Fig1

Figure 1: $10,000 invested in the S&P 500 1 year ago (Source: Factset)

If you take a look at the performance of the S&P 500 for the past year, you have every reason to freak out. You spent an entire year investing your money, only to see it go down 12%. Why even invest in the first place? The key is to maintain perspective. Zoom out and look at the performance of the S&P 500 for the past 10 years, and you see a completely different story. If you invested 10 years ago, your money has more than doubled in the past decade, and that's including this downturn!

Fig2

Figure 2: $10,000 invested in the S&P 500 10 years ago (Source: Factset)

The reason people invest isn't for a quick gain in the next couple of weeks, months, or even years. It's because investing is a means to reach their long-term goals, the keyword being long-term. Take retirement, for example. As a young professional, I don't care what happens in the next year, 5 years, even the next couple of decades. My retirement money is meant for 30-40 years from now. Over time, the market has always gone up, and while we can't 100% guarantee that it will do so in the future, history gives me plenty of confidence that it will recover from this setback and continue to grow to new highs. On the topic of recovery and growth, what's really allowed me to stay positive is…

Investing on a Monthly Basis

Since I graduated from college, I've been investing a fixed amount of money every month. It's a method that's known as Dollar Cost Averaging. By contributing monthly, I'm able to take advantage of natural fluctuations in the market. It puts me in a win-win scenario. When the market goes down, my monthly contributions buy more shares, and as the market goes back up, I obtain more profits from those increased shares.

Nobody has a crystal ball that predicts exactly what is going to happen in the future. If someone told me at the beginning of 2020 that I would be working from home for 2+ months, I wouldn't have believed them in a second. That same philosophy can be used in trying to predict the market. Although history has shown that the market increases over time, it's impossible to predict peaks and troughs. Making monthly contributions gives you the opportunity to buy in at the low and while continuing to invest during periods of growth. If you have savings built up in the bank, you can follow the same process by investing a little at a time, rather than putting all your savings in at once.

Now we've talked about mentality and process, but what about my actual investments keeps me reassured? The key is…

Staying Diversified

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Figure 3: $10,000 invested in Stocks vs Bonds over the past 10 years (Source: Factset)

One of the biggest fears when it comes to investing is the possibility of losing money. There's no way you can avoid 100% of this downturn while investing, but one of the best things you can do is spread out your risk amongst various companies, and event types of investments. When you diversify your investments, you are not putting all your eggs in one basket. While some companies, such as airlines, are taking huge hits from this downturn, others, such as technology-based firms, have had muted losses, if not gains. Spreading my investments amongst a wide base of companies reduces my risk of suffering from major losses.

On top of that, I mix my investments between stocks and bonds. Bonds are investments that are meant for safety and stability, so by including bonds in my portfolio, I'm able to dampen the drop in the value of my investments. In general, when you are investing more for growth, you want to have more stocks in your portfolio, and if you are investing for a reliable source of income, you want more bonds instead. The tradeoff between investing in stocks vs. bonds is that the more you invest for growth, the more fluctuation you must be comfortable with.

The easiest way to properly spread out your risk is by investing in Mutual Funds or ETFs. These funds generally hold hundreds, if not thousands of different investments within their portfolios. Because our firm is independent, we have access to thousands of different funds and I've invested in allocations of stocks/bonds that I am comfortable with into funds whose investment philosophy I trust.

All of these are a part of the underlying reason why I feel confident about my finances, I have a concrete plan put together and all I need to focus on is following it. One of the hardest aspects of managing finances dealing with all the moving parts in one's life. Being able to take all those moving parts, put them together, and create a cohesive financial strategy does wonders to your confidence about your money. As a financial advisor, I'm happy to sit down with you and create a customized plan for your specific situation.

I hope everyone continues to stay optimistic during these trying times. Take advantage of this time to pick up a hobby, do some inner reflection, and strengthen the relationships of those around you. The biggest thing that we have control over, is our thoughts, feelings, and actions. We are all in this together, and together we will come out much stronger than before.

Ziad Hijazi is a Financial Advisor of Santa Monica, Calif-based Gerber Kawasaki Inc., an SEC-registered investment firm with approximately $1billion in assets under management as of 03/02/20. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss. Readers shouldn't buy any investment without doing their research to determine if the investments are suitable for their situation. "All investments involve risk and one should consult a financial advisor before making any investments. Past performance is not indicative of future results."

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