How to make better financial decisions
As the coronavirus pandemic continues to challenge every aspect of our lives — work, family, health and money — it is imperative we all take a gut check on any of our portfolio exposed to the wild rides of the financial markets.
A recap is important: According to JP Morgan’s Q2 2020 Guide to the Markets, the S&P 500 index hit its last historical high on Feb. 19, 2020. It then promptly plummeted over the next four weeks, dropping 34%. That epic plunge ended the longest bull-run in stock market history on March 12, a few days after its 11th anniversary.
Since March 23, the S&P 500 index has had a furious, if uneven, rally, recovering nearly all of its 2020 losses. Some might suggest we are now out of the woods, but I would say, “Not by a long shot.”
I encourage all investors to hope for the best but prepare for the worst. Remember, the S&P 500 index dropped 49% from 2000 to 2002 and 57% from 2007 to 2009. Will the economic challenges created by this crisis be less? That history is yet to be written.
As an investor, I’ve now lived through everything from the crash of 1987 to today. As an adviser for 14 years, I’ve helped clients navigate through both the Great Recession and today’s pandemic crisis.
What I have seen and felt is the emotional tug our investments have on our decision-making and stress levels. Some people handle it better than others.
Luckily, there is an entire school of academic thought — Behavioral Finance — that equips us with observations to ease our anxiety and help us make better decisions during difficult times. Using the thinking behind Behavioral Finance, here are some lessons investors could take away right about now:
It is only a loss if you sell it.
The urge to sell everything during panic moments is real — something I’ve seen firsthand with my own clients during the 2008 downturn. Now consider the following scenario:
A couple lives in a $500,000 house, and they have a $500,000 retirement portfolio. A recession hits, and the values of their home and their portfolio fall to $350,000 each.
Someone knocks on the door and makes an offer to buy the couple’s house for $350,000. It’s not necessarily an unreasonable offer in the current market, but the couple find it easy to turn down the offer.
Why? Because they trust that eventually the value will return. Yet that same couple may at the same moment panic and put all of their retirement account into a cash equivalent.
How do we reconcile these two decisions? It is the emotions of the market.
I suggest to you to look at your retirement nest egg as your house. It is only a loss if you sell it. Markets go up and down, but over the long run, they have always gone up.
Stocks are on sale right now.
Another method for quelling your anxiety due to a volatile market is asking yourself, “When is the best time to buy a house, or anything we may value (e.g., shares of stocks)?”
We all know intuitively: when it’s on sale. But I have seldom seen investors who put this common-sense approach to practice in the investing world.
I suggest to investors during times of panic, in buying into the falling market, you are taking advantage of things being on sale. Investors can, if they choose to, go further and shift funds from bonds to stocks during down markets.
This increases risk, and it has to be carefully considered before doing so, but it is a compelling way of taking advantage of a crisis. A financial professional can help you decide if this is the right step for you.
These are the times that test our patience. Recoveries can be entirely unpredictable and uneven, and trying to time a low point (or a high point) is a fool’s errand. History has shown us that the markets will eventually rebound; cyclicality is a feature of the markets, not a bug.
But if it turns out that you don’t have the stomach for the uncertainty — and that’s okay — rather than pulling out of the markets altogether, consider investing in principal-protected instruments like annuities, which are less susceptible to the volatile swings.
At the end of the day, though money and emotions may always be intertwined, you always have control over how you react.
Letcher, CRPC, is a financial adviser at CUNA Brokerage Services. The opinions expressed are his and do not necessarily represent the opinions of Kiplinger, CUNA Brokerage Services, Inc. or its management. This article is provided for educational purposes only and should not be relied upon as investment advice.
© 2020 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.