On a normal day, it is easy for the average American to ignore what the stock market is doing. During the coronavirus (COVID-19) pandemic, however, news outlets seem to be focused on stock market performance more than usual, making it impossible to ignore. Of those who have been paying attention, some have taken advantage of falling stock prices by purchasing more stock. At the same time, others may have looked into buying toilet paper and hand sanitizer futures for their 401(k) plans. I’m kidding! In case you were wondering, there is no such thing as a toilet paper futures market. The current market volatility is an opportunity to revisit your financial plan, remain calm, and capitalize on fear.
Recently, the Capital Group shared “4 Ways to Stay Calm When Markets Stumble.” I will share and expand on those valuable tips to help you keep your financial house in order during this difficult time. We all need to keep our emotions in check, do what we can to stay on course for our own financial goals and avoid the big mistakes that can drastically reduce your long-term investment returns. The lower your return on investment, the harder it will be for most people to reach financial freedom.
Is Now the Best Time to Invest?
In my last post, “Is Now the Time to Invest in Stocks,” I shared a few reasons to invest when the stock market gets exceptionally volatile. Included were three investors and how they handled the financial crisis of 2008-09. Long story short, the investor who stuck with her 50% Stock / 50% Bond portfolio ended up the richest by the end of 2017. Moving to safer investments cost the other investors substantially more over time. Investor 1- turned $1 million into $1.9 million. Investor 2 went to 100% bonds and ended up about even by the end of 2017. Investor 3 went to cash, stayed there, and ended locking in his losses.
Market volatility is nothing new. I always tell clients to expect, on average, a 10% drop each and every year. We can also expect a 20% (or greater) drop every four to five years. Trying to avoid these downturns is impossible. Capitalizing on them is not. Most of the time, investors who are well-advised and stay the course will do better over time.
4 Ways to Stay Calm When Markets Stumble
1. Keep investing — in good times and bad
In a perfect world, you will be investing automatically into a well-diversified portfolio, appropriate for each of your various financial goals. You may have a different portfolio for your purchase fund compared to your retirement accounts. Setting up automatic contributions will help you to continue investing in both good and bad times.
This first tip was not included in the Capital Group post, but it’s more relevant for the average investor.
2. Revisit your long-term Financial Plan
Having a comprehensive financial plan can make it easier to stay the course when stock markets get scary. If you know you are putting money into your 401(k) every month so you will be able to retire in 20 years, a temporary drop in account value will most likely be easier to ignore. Many of you will not be retiring for another 20, 30, or even 40 years, so a portion of that account value may not be needed until 50 or 60 years from now. When you retire, you can turn your investment into a paycheck, withdrawing a relatively small portion of the account each month. I don’t have a crystal ball, but I’d be willing to bet that the Dow Jones Industrial Average will be higher in 2080 than it is today.
Working with a fiduciary financial planner can help make staying the course easier. We are here to remind you why you have theses accounts and their underlying investments. It may be tempting to put a halt on your 401(k) contributions, for example, but during a time like now (the COVID-19 stock market panic), that is one of the worst things you could do.
3. Place Current Events in Historical Perspective
With the 24-hour news cycle, it’s easy to get sucked into every tiny movement of the stock market. Throw in the news of stock market futures on social media, and it becomes nearly impossible to avoid news of the stock market, good or bad. For those looking to become or remain, successful investors, keeping a long-term perspective is essential. From a historical perspective, you can see that markets often react to the news of events in the short term, and they have tended to reward patient investors who stayed the course over the long term.
AIDS, SARS, Avian Flu, Swine Flu, MERS, Ebola, Zika, each of them made the news and likely had adverse effects on stock market values around the world. Eventually, global markets shrugged off the impact of each and continued their historical upward trends. While past performance is not a guarantee of future results, it does offer a valuable perspective for the future.
The truth is, we don’t know how the COVID-19 pandemic will play out. Nobody knows exactly when, or if, the stock markets will turn positive again. We have no guarantee that a cure, treatment, or vaccine is coming.
If we use history as a guide, we can get a sense of what the future might hold for treatment or minimization of the risk from COVID-19.
- 2003 — SARS saw 8,000 people infected. It was brought to an end by good hygiene (handwashing) and environmental factors (warming temperatures), and it burnt out when enough people became infected to build an immunity to the disease.
- 2009 — H1N1 Flu caused a pandemic in ‘09 and has now become a seasonal flu, usually recurring in the colder months.
- 2014 — Ebola in West Africa ended with human intervention when the World Health Organization (WHO) declared a coordinated international response. Countries worked together to administer to the sick. When a second outbreak occurred in 2018, the human intervention made the difference again when treatments, developed from the first outbreak, were offered to patients.
How will COVID-19 end? Who knows? But I am confident that this too shall pass.
4. Acknowledge the Power of Emotions on Financial Decisions
Over the past few years, there has been more research from behavioral economists showing that people often act irrationally when making investment choices. There are strategies to help minimize the risk of letting your emotions take over, which often leads to terrible results when investing. People often end up being greedy when they should be fearful and fearful when they should be greedy.
I’ve been doing this for nearly two decades, and I know throwing a bunch of stats at you won’t alleviate all emotions from your investing. What I can say as a financial planner, I can help you make your investment choices based on what will help you reach your long-term financial goals. Sometimes things as simple as Dollar Cost Averaging and Diversified Portfolios are enough to keep you from going all-in on a hot stock tip you may have heard a friend bragging about during one of your COVID-19 virtual happy hours.
Do what you can to keep the focus on the bigger picture. Be aware that biases can affect your thinking as a person and as an investor. Those factors may lead you to believe your situation is actually worse than an impartial analysis would reveal.
- Confirmation bias: Giving more weight to trends you already believe in.
- Availability bias: Giving more weight to recent events.
- Framing effect: Letting the presentation of information affect your interpretation of it.
How can you not be stressed when watching cable news? Those news networks seem to present a good chunk of their stories as life-changing BREAKING NEWS. If you watch Fox News, you may be tempted to believe the coronavirus is all a hoax. While I am not a medical professional, several have said this issue is serious. How long will it be a threat to our retirement accounts, jobs, and ability to hang out with friends? I don’t know, but like all previous illnesses that threatened humanity, I am confident this pandemic will also pass.
Parting Thoughts- Should You Be Investing Now?
When times get tough, would you rather have a smooth 1% return or a bumpy 10% return? With investing, the choice isn’t always that clear cut in the short term, but often the results are that starkly different over the long term. Few Americans would be able to save enough money in order to create a secure retirement income they couldn’t outlive earning just 1% per year. While earning 10% per year, won’t guarantee that you will never run out of money, it sure would make it easier to reach financial freedom, and more importantly, maintain your financial independence.
When will the COVID-19 crisis end? I have no idea, but I am confident that this, too, shall pass. Work with your fiduciary financial planner to make sure this illness doesn’t derail your finances.
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