The human race has accomplished a lot: Our ancestors developed tools and agriculture. Prior generations created beautiful works of art and magnificent structures. In the last 100 years, we have traveled to the moon, gone to the deepest parts of the oceans, and split the atom.
Yet despite all these successes, we are still heavily influenced by our emotions. This influence is so powerful that there is an entire field of study devoted to understanding how our emotions impact our investing and spending, called behavioral finance. Our feelings are what make us human, yet can also crush our financial well-being.
Being aware of how our emotions can work against our finances is vital to the implementation of our financial planning. One of our human reactions in times of stress is the strong urge to do “something”. It is not just our own expectations, either. When we cannot act, we expect others to do so. Whenever some headline-grabbing event takes place, how satisfied do you feel hearing the powers-that-be say “We need to do a better job” versus “We need to … [pass a law, form a committee, create a regulation, etc.]?”
What all of us forget from time to time is that doing “nothing” is doing something. Doing nothing is a choice, and sometimes it’s a good one. If you look back at decisions you made when you were under extreme emotional stress, how often do you like what you said or did at the time? Sure, some decisions worked out well. But I can bet most of them you would like to do over. Don’t believe me? Think back to the last argument you had with a loved one. Are you happy today with how the conversation went?
These kinds of decisions frequently come up during stock market sell-offs. Most of us think about selling our stocks with the intent of buying back at the low point of the sell-off. It is a fantastic plan if you overlook one small detail — very few people have successfully done it! Remember, it’s not enough to only know when to sell you also have to know when to buy. Several studies have shown how difficult market timing is for professionals. It’s reasonable to assume that if it were a skill as opposed to getting lucky all the pros would be doing it. Moreover, the cost of being wrong can be high. Missing just a couple big up days in the stock market can dramatically impact your earnings.
You may be aware of this but being able to lessen its impact is another. One way to achieve this comes from financial planning. Part of the planning process involves thinking through how to act when different situations arise. When these situations do occur, you will have the comfort of having thought through your actions. Many people find an extra advantage working with an advisor who can calmly remind you of the process you had previously gone through.
If you are doing “something,” either by choice or necessity, keep in mind your actions do not need to be dramatic. Frequently the little things can yield substantial results and, if they turn out to be the wrong move, they tend to be easier to undo.
What do little things look like? It depends on the situation, but for simplicity let’s continue talking about the stock market going down.
- Rebalance your accounts
Instead of trying to time the market, rebalance your account(s). You may already be investing using an allocation, such as 60% stocks and 40% bonds. Rebalancing resets our current investments to that allocation level. Moreover, your allocation was likely determined in a rational setting when you were thinking of your long-term goals and not short-term market gyrations.
- Accelerating your savings contributions.
If you plan on saving $100/month, and have the cash, take the $100 that you would contribute in the next month and contribute that today. Note that I am not advocating putting extra money into your investment account, just changing the timing. That is key here, little steps.
Understand though, these steps are dependent on nothing else having changed in your situation. However, sometimes your situation does change. When that happens, you need to be willing to change too. If you think you need to pull money from your account, selling instead of running the risk of the market being lower may be the prudent move. No one likes to take a loss on investments, but a smaller loss today is better than a larger one tomorrow.
This period is also an opportunity to get to know yourself better. The investment allocation you currently have came from your future needs and risk tolerance. Risk tolerance is how planners describe your comfort level with investments going up and down. Typically, your tolerance level is determined with a series of questions (such as the one we use). The problem is that you are answering based on your mood at the time, which means as your mood changes, your tolerance may change. While determining your tolerance when you are most fearful is not ideal, you may benefit from remembering how you felt to determine if your allocation should change – once your emotions have settled.
Think of sayings that we still use today, such as: “Better to remain silent & be thought a fool than to speak & remove all doubt” or “It is better to light a candle than curse the darkness.” Even my favorite country singer from the 1980s, Keith Whitley, sang, “Now you say it best when you say nothing at all.” They all extoll the virtue of reacting with purpose and not reacting just to react.
So we encourage you, before you rush into a decision, step back and take a deep breath before making a move that you may later describe as, “It seemed a good idea at the time.”
Watch our latest YouTube video here where we further discuss what investors should do during low points in the market.
If you would like to talk to a Certified Financial Planner access our calendar here to set up a time that’s most convenient for you, and we can talk about your specific situation.
Kevin focuses on helping people with retirement income planning. He is concerned that too many people become overwhelmed as they shift from building their retirement savings to using their retirement savings to support their desired lifestyle. By engaging in a robust planning process, he aims to lessen the financial fears we all have after we end our careers. Learn more about Kevin