The emergence of COVID-19 has created unprecedented volatility in the financial markets. During times of stress, the feeling of fear can be almost palpable. Emotion overrides rationality, and can result in seller’s remorse.
If this sounds like you, with the market up nearly 25% since hitting it’s nadir, what are you thinking? Are you hoping for horrible economic statistics to force the market down and validate your decision to sell? As the market continues to climb, are you now in the emotional grip of FOMO (fear of missing out)?
Responding emotionally can be helpful in life threatening situations. Emotional investment decisions, driven by fear or greed, typically leads to sub-optimal outcomes. If you hit your “pain point” during the COVID-19 bear market and sold, missing most if not all of the recovery in stocks, here are some points to consider:
- Get a Financial Plan– When clients call us looking for reassurance during market downdrafts, the first point of discussion is their financial plan. During stressful times, what matters most is not the transitory value of their investment account, but the sustainability of their financial plan. People without a plan may view the value of their investment account as a proxy for a plan. It is not. Having a financial plan can give you the perspective to hold on when volatility strikes.
- Volatility Can Be Your Friend– Most of our clients buy into the proposition that buying low augurs well for future gains. Without downside volatility, there would be few if any opportunities to buy shares at lower prices. Buying low in a disciplined fashion can take guts, but is often the surest way to future profits. This is what we mean when we tell clients to “use the market, rather than being used by the market.”
- The Stock Market is Not The Economy– So many people mistakenly believe (including our president) that the stock market is a proxy for what is happening in the economy. It is not! People wonder how it’s possible that with record unemployment, the market continues its ascent; seemingly taking little notice to the economic devastation all around. In another blog post we will address this seeming contradiction, but suffice it to say that looking at economic indicators as a means of forecasting market direction is an unreliable way to create wealth.
- Have a Plan For Averaging Back Into The Market– The best way to avoid making an emotional investment decision in the future is to devise a mechanical plan for gradually averaging back into the market. Your plan can incorporate monthly or quarterly investments, up to a desired percentage allocation in stocks. By removing emotion from the investment equation, you remove the impossible burden of trying to guess highs, lows and the intermediate direction of the market.
Emotional responses to market volatility can feel like the right thing to do, but invariably leads to seller’s remorse. If you feel like bailing in the future, refer to the first 3 bullet points above. If you give into the temptation to sell, the last bullet point offers a plan for easing back into the market.
Contact us, we are here to help!