“The sky is falling” cries Chicken Little in the well-known folk story. In this tale, an acorn falls on Chicken Little’s head and she takes it as a sign that the sky is falling, and the world is coming to an end.
Investors can have this mentality when fear and doubt creep in or if they are blindsided by volatility in the stock market. 2020 and 2021 have undoubtedly been two of the most shocking years for investors since the Global Financial Crisis of 2008/2009. First the outbreak of the pandemic, next to the bitterly partisan election, then the pandemic’s second major wave, and most recently a 40-year inflation spike. Yikes! It’s a lot.
Since it’s not a matter of “if” the market will fall, but “when”, here are my keys to staying invested:
- Hold some cash – Make sure you have enough cash or similarly safe assets for short-term needs. With interest rates so low, it’s hard to hold cash. However, if you need the money within the next few years, you may have no choice. This goes hand in hand with knowing why you’re investing and making sure what you own matches up to the intended need and timeline for those funds.
- Know why you’re investing – I like to employ a “goals-based” approach to investing, helping my clients understand the purpose for each account. Knowing when the money will be needed which is often well into the future, helps you ride through the bumps along the way. Each of your accounts should be allocated according to their intended use and your tolerance and capacity for risk.
- Plan – Putting in the work ahead of time and creating a personalized financial plan, helps my clients keep their eye on the prize and not on the noisy nonsense around them. People rarely make good decisions when they are stressed out and under pressure. Stay calm by focusing on your long-term plan rather than short-term performance and volatility.
- Expect volatility and avoid “recency bias” – Recency bias is an unfounded conviction that recent trends will continue. It’s a trick that our brains play on us and a primary culprit that prevents investors from achieving higher returns over time. It’s natural to want to own what has done well in the past and want to avoid what hasn’t. In down markets, it’s tempting to sell losing positions, locking in losses. But the key is to stay invested and participate in the rebound.
- Don’t look at your investment accounts too often – With the stock market reaching new highs daily, many have never seen their net worth so high. While this can be a source of motivation and pride, it can also be your undoing if you see your portfolio moving in the wrong direction. To control your human impulse of acting and making changes to your portfolio, you may need to ignore it for a little while. This is a great time to call your financial advisor to reaffirm your true goals and give you the determination to stay invested.
Work with a financial advisor – You don’t know what you don’t know. Partnering with a professional can help you see your blind spots and perhaps help you capitalize on opportunities when the markets falter. During rough patches in the stock market, it’s helpful to have a relationship with someone you trust.