None of us planned for this crisis.
It probably seems like a long time ago, but our first blog post of the year, titled Return on Life vs Return on Investment, gave us the foundation for dealing with the current challenge of the COVID-19 and market volatility. The key is not letting heightened emotions and bad headlines steer you toward decisions that could have a negative impact on your finances long after this crisis has passed.
Easier said than done, right?
So how does a financial plan, rooted in the principles of Return on Life rather than Return on Investment, handle a crisis like we are currently experiencing? Below are a few practical strategies to employ.
1. Acknowledge your emotions.
Worry. Anger. Uncertainty. Nervousness. Maybe even a disbelieving chuckle or two at the craziness of it all.
Whatever you’re feeling right now is OK. We understand that your financial concerns are just one part of a very complicated and very personal situation involving your family, your work, your health care, and your basic needs. Add in the anxiety we’re all feeling about the situation in the wider world and you wouldn’t be human if your emotions weren’t a bit jumbled right now.
So please understand that when we advise you to take emotions out of your financial decision making during a crisis, we are not advising you to ignore what you are feeling. On the contrary, we encourage you to talk through your feelings with your spouse, children, co-workers, and other close friends or family. Burying your emotions only makes stressful situations more stressful. Our human capacity for empathy, understanding, connection, and mutual concern is going to help us all weather this storm. It’s also going to lead you towards healthier and more productive outlets for your feelings, such as charitable giving and finding creative ways to support local businesses.
2. Ask yourself this question: ”Has my timeline changed for needing money”?
Because we plan for clients’ lives, not just their money, we always take in a wide view of financial progress. Today’s big market dip will look like a blip with a thirty or forty-year panoramic perspective. But “stick to your plan” doesn’t mean we don’t do anything during a major market correction — especially if you’re at or nearing retirement age. It means that the moves we contemplate are based more on your upcoming transitions than they are on unpredictable market movements.
Most of your transitions will already be things we have discussed and planned for over the course of our work together. However, it is imperative during times like these to be in communication with your advisor if your timeline for your money has changed.
3. Ignore the headlines that ask “Is this the bottom?” or something similar.
The only people that claim to know the bottom of the stock market are either trying to sell you a get rich quick book or a monthly subscription to a stock picking service. The truth is nobody knows when the market might “bottom”. Who would have guessed at the time when looking at the data that March 9, 2009 was the bottom of the market in the last financial crisis?
What we can say is that stock prices are very good, and this could present a good opportunity for long term investors. Do not try and wait for the bottom because it is hard to hit and easy to miss.
The stock market does not look at where we currently are as a country, but where we are going, and that perception can change on a dime. The market can increase substantially even as the country is still struggling with this virus, it just needs to see the end in sight and/or clear action from Congress that make the effect of the virus less severe.
4. Don’t think that sticking with your investment strategy is the same thing as doing nothing.
In our first quarter 2018 newsletter we wrote an article that went into more depth on the effects of emotions on investment decision. Behavioral researchers have discovered that when humans are experiencing turmoil, whether in their personal lives or the stock market, we have a powerful urge to “do something” even when that “something” doesn’t make a lot of practical sense. Applying this logic to the last “big” market turmoil – the 2008 market meltdown – many investors gave in to the instinct to sell because it satisfied their desire for action. But those who stayed put benefited in the long run as the market recovered. There was a great study done by these behavioral researchers with goalies and I highly recommend you click here to read the full story from our newsletter.
5. Rebalancing your portfolio helps to maintain an appropriate amount of risk.
Simply put, rebalancing a portfolio means maintaining your original asset allocation strategy through time. For example, if the long-term goal of a portfolio is to have 60% stocks and 40% bonds, and stocks perform well during a given period (as they did during 2019) the stock portion of the portfolio could grow to 70%, while the bond portion shrinks to 30% of the portfolio. Therefore, using a rebalancing strategy means you would sell stock and buy bonds to realign the weighting to the original goal allocation.
This same strategy holds true during a down market, where your 60% stocks may have “shrunk” to 55%. A rebalancing strategy, like the one employed by Stewardship Advisors, would buy stock now when it is on sale, which aids in your portfolio’s recovery and also lowers the risk of your portfolio not properly aligning with your comfort level for risk as the market recovers.
No, times like these are certainly not easy. I’m typing this article from my home office on a rainy day as my three year old, who doesn’t quite grasp the “work from home” idea asks me to build yet another train track and my kindergartner is using our couch as his personal climbing wall for gym class during our unplanned homeschooling experience. However, using the above strategies we will continue to walk with you on this journey, and together we will come out the other side.