You’ve spent years building a retirement nest egg, then the market takes a nosedive. You’re down $150,000, then $250,000 or more. Now you think maybe you should change how you invest or maybe investing isn’t for you. You are not alone in your thinking.
The financial adage says, “A recession is when your neighbor loses their job, a depression is when you lose your job.”
We all think we can handle loses in the market until it actually happens to us.
“A man who carries a cat by the tail learns a lesson he can learn in no other way.” – Mark Twain
Making financial decisions alone, especially during times of market volatility, can be especially challenging. It’s easy to make the wrong choices when you see hard-earned money disappearing. But when it comes to investing, having a steady head and hand is crucial. If you make spontaneous decisions based on emotion or the ever-present ebbs and flows of the market, then you risk turning your carefully invested funds into little more than gambling money.
How do you keep yourself from becoming a gambler?
- Know Your investment philosophy. Having a clear vision of how you invest, what you own, and why. This is essential for making decisions that serve your larger financial goals. Knowing your investment philosophy will keep your eye on the big picture instead of market highs and lows. Knowing what you own can calm your nerves.
- Focus on the Long Game. It can be tempting to check your investments every day. After all, you want to see how you’re doing and how you could do better. But checking your performance too frequently does more harm than good. It may make you anxious, encouraging emotion-based investment decisions. Instead, check your investments on quarterly and yearly basis. This way your financial goals are the focus, rather than market gyrations.
- Hire a Financial Professional. Is this statement a bit self-serving? Yes, it is. But it doesn’t mean it’s not the prudent thing to do. Would you go to court against a large powerful company without an attorney? If you needed a medical procedure, would you think about doing it yourself, I would hope not. The value of working with a financial professional is that you can counter some of the risks that come with investing.
Regularly staying in touch with them will help you feel less isolated in your financial decision-making. They can share the research burden with you and devise a plan to implement investments based on your goals. Are there possible new investment opportunities? This partnership is especially beneficial when your investments fall in value.
Are there tax-loss opportunities? Most people who lose money during market declines liquidate their investments while the market falls, then re-invest after the market recovers. Essentially, they sell low and buy high, which is the complete opposite of what you want to be doing. Do this a few times, and it makes it almost impossible to efficiently meet long-term financial goals. If the market dips and you feel anxious, call your financial professional.
They can recommend how to respond to market downturns in a way that aligns with your goals. Having someone other than yourself can help take the emotion out of your financial decisions and help you stick to your plan.
- Trust Your Financial Plan. If you’ve worked with a professional to develop a sound financial plan, then you can rest assured that market volatility is accounted for. But there are some instances where your financial goals may shift, and you need to re-evaluate your plan. Talk to a financial professional if you have questions or concerns.
When the stock market takes it on the chin, you really learn whether you are a gambler or an investor.
-Paul R. Rossi, CFA