As you know, the coronavirus pandemic is not only a health crisis. It's also causing an economic crisis. That's why, over the last month or so, many of my clients, friends, and family have asked me what investors should be doing about all this volatility. So, I thought I would write down:
Five Do's and Don'ts During Times of Market Volatility
1. DON'T panic and make emotional decisions.
During times of uncertainty or fear, humans are prone to make decisions based on their "fight or flight" response. Yes, this is even true of our financial decisions! When market volatility strikes, many people make knee-jerk decisions simply so they can feel like they are doing something. So they can feel "in control." But think about when you're driving a car, and you see an animal in the road. What happens when you jerk the wheel? Yep - you'll probably overcorrect and increase your odds of crashing. The same is true with your money. Knee-jerk or emotional decisions, often tend to do more harm than whatever it is we're reacting to! So, when making a decision, always ask yourself "Why am I doing this? Do I have a specific reason, or is it just because I feel like I have to do something?"
2. DO think long-term.
Investing, by its very nature, is a long-term activity. Even people who are close to retirement are still investing for the long-term. That's why, while bear markets are uncomfortable, they're also somewhat overrated. Markets fall over days, weeks, and sometimes, months. But history has shown that they rise over the course of years and decades, which is good, because you'll probably be investing for years to come!
To return to my driving analogy, think of the last time you were caught in a traffic jam. You're sitting there, idling in traffic, when suddenly, the lane next to you starts to move. So, you quickly merge into that lane, only to get stuck again. Meanwhile, the lane you were just in is now moving...and all the cars that were once behind you are now speeding ahead.
Maddening, isn't it?
When bear markets hit, investors often panic. Instead of sticking to their long-term strategy, they sell, sell, sell - at a time when everyone is selling. This means they are selling low. In other words, they try to change lanes in the middle of a traffic jam.
But again, we're in this for the long-term. The road we're on stretches for miles. Sometimes the speed limit is 75 miles per hour. Sometimes it's only 25. Trying to take shortcuts just leads to longer delays.
3. DO think about your current asset allocation and risk tolerance.
Market volatility is a good time to determine whether you are invested the way you should be, given your age, financial goals, and ability to take on risk. Generally speaking, younger people can often afford to weather extreme volatility more than older people who are very close to retirement. So, look at your portfolio to determine whether it's time to move into more conservative investments that leave you less exposed to the kinds of swings we're experiencing in the stock market. And remember that you can always ask a professional for a second opinion if you're unsure!
4. DON'T look at your portfolio each day and stress about every dip in the stock market.
That said, one of the worst mistakes investors can make is to obsessively check how their portfolio is doing. The markets are like a person's body temperature - they are constantly rising and falling. Just as you probably don't take your temperature every day, you don't need to do that with your money, either. Again, think long-term not short. Prioritize your overall financial health over the day-to-day.
5. DO set up an emergency fund if you haven't already.
Like market volatility, economic recessions are inevitable. Sometimes they affect us, and sometimes they don't. There's no way to see the future, but we can prepare for it. Setting up an emergency fund, with enough money inside to cover three-to-six months' worth of living expenses, is always a good idea. This is especially true right now, given that many people may be out of work or in quarantine for some time.
Market volatility is never fun, but it is a normal part of investing. So long as we remember to think long-term and rely on ration over emotion, we can continue working towards our goals and dreams.
And that is what investing is all about.
If you ever have any questions or concerns about the markets, please feel free to contact me. I am always happy to chat!