As part of the financial planning process at Ogorek Wealth Management, we talk about how market volatility is a normal part of investing and how we structure your investments to “weather the storm” which will maintain a comfortable level of income for you and your family during turbulent times.
We also understand that even folks who are armed with this knowledge can get nervous during a market dip. What’s important is that you know how to prevent that initial wave of negativity from leading you to rash decisions that could damage your nest egg much worse than a market correction.
Dr. Martin Seay is a specialist in positive psychology, which focuses on strategies that people can use to improve their sense of well-being. Dr. Seay’s “ABCDE” method can help you work through your reactions to distressing financial news and arrive at a positive outcome.
Let’s walk through an example of how to use this method to avoid making a bad, emotion-based financial decision.
A. Activating Event
Sometimes stress and anxiety can feel all-encompassing. Dr. Seay believes it’s important that we pinpoint the event that triggered our negative feelings.
So, while you might feel general anxiety about your finances, drill down a little deeper. Is your job secure? OK. Are you saving and investing according to your financial plan? GOOD. Did you just read something on social media about the market? THERE IT IS.
Market volatility can rouse some of our worst instincts about investing. We might fall back on long-buried Beliefs like, “This game is rigged!” We might feel like we’ve entrusted our financial future to powers beyond our control.
As you work through this step, it’s important to ask yourself where your Beliefs come from. Have you been unsettled by widespread media coverage of major financial problems, like the 2008-2009 housing crisis? Have you had negative interactions with the finance industry in the past?
Figuring out why you believe what you believe about the markets can help alert you before you fall back into bad financial habits.
Panicked investors who can’t shake negative Beliefs about the markets often make poor decisions during downturns. They think they need to “get out fast” to avoid more negative Consequences, like further losses.
Ironically, cashing out your investments during a market correction usually leads to far more serious Consequences in the long run.
So how can you stay focused on the big picture?
Start by using what you know to push back a little against what you Believe.
For example, the historical, long-term trajectory of the financial markets has been to rise over time. Therefore, when the market does have a temporary drop, we might say, “The Dow was down x hundreds of points today.” It sounds like a big number, but as a percentage, it may just be normal volatility.
“Market timing” strategies usually just don’t work. That’s why your portfolio is diversified, balanced, and strategically rebalanced as necessary. Decades of market history have shown that sticking to this type of investment strategy may be more effective – and stable – than trying to jump in and out of the market based on what’s happening in the news right now.
Losses are really just a kind of “tax” that you’re paying on the wealth your building for tomorrow.
It’s amazing how just reminding ourselves of what we know to be true can make us feel better about a negative situation. Hopefully at the end of this process, you feel a renewed sense of positivity about this present moment and your financial future.
We understand that market volatility can be complicated. And as you’re nearing retirement, a downturn can be downright nerve-wracking.