The mental and behavioral aspects of investing are things that don’t always get talked about as much as they should, but they can be critical to making sure a plan stays on track. In times of large market drops or high volatility it can be very tempting to take some sort of action that isn’t in line with your plan. During the Covid-19 pandemic we've seen the S&P 500 index drop by more than 33% from the peak in February. Since then the index has climbed back up over 30%, creating some of the wildest swings in the history of the market. In times of fear or uncertainty it can feel better to just do something to give yourself a feeling of control over the situation, but this can be really damaging to long term goals. We can look back on past market events to try to understand what led to them and how the recovery happened, but each one is different enough that when we’re in the middle of the situation it’s nerve-wracking to most investors. It’s easy to say “stay calm” in these situations, and much harder to actually do it, so there are some good things to do in preparation for times like these.
What can you control?
We can’t predict what markets are going to do in the short-term, but there are many things to do that will set you up for success in the long-term. Having a good plan in place before we experience major market events is one of the most important things investors can do to set themselves up for success. With investing it’s critical to think about the facts and what your goals are, while removing emotions from it as much as possible. So without trying to time the market or take other risky actions, what are some things you can control during market turbulence?
Have a Plan
The first step every investor should take is having a solid plan in place. It’s a good idea to have a written document that outlines your goals and beliefs, such as an Investment Policy Statement (IPS), because it gives you something to look back on if you are considering making any changes. If an investor is going to make a decision that goes against the IPS it should mean that either a major goal has changed, or some other long-term difference has altered the strategy. Having this document written out helps to bring everything back to the facts and think about the investment philosophy in more logical way. Creating this strategy and written document in calmer times will help pave the way for a successful plan to be followed through in the future.
Keep Emotions in Check
This is redundant and goes hand-in-hand with every other thing investors have to think about, but it’s probably the most important factor to consider. Plans can easily be derailed by a single emotional decision that goes against everything that has been prepared for. This is why we talk about things like risk tolerance as well. It doesn’t matter that you can potentially achieve higher returns by taking more risk if you can’t stomach the market drop. Panicking and selling at the worst possible times can do more harm to a portfolio than just starting out with a lower risk profile in the beginning. It’s easy to see why this is an emotional topic, it’s people’s life savings we’re talking about, which is why it is so important to prepare and see past the emotions when we can.
Maintain or Boost Savings rate
We can’t control how much the markets will return, but we can control our savings. Putting your savings on autopilot is a great way to smooth out the bumps, and keep your plan moving whether times are good or bad. If the market is dropping, you get to buy at a discount, which is especially good if you won’t need the money for a long time. The term that is sometimes used for this is ‘dollar cost averaging’, which means you’re just depositing the same amount of money on a set schedule no matter what the market is doing. Having rules like this is another great way to help remove emotions from the situation and just keep following the plan.
Be Mindful of Fees
Fees are a big issue, and unfortunately at times they can be extremely well hidden from consumers. Having large fees that aren’t providing any real benefits can really drag on the value of a portfolio over time. This is an even bigger issue to consider when markets fall because money is being removed from the account at a lower point and slows the recovery afterwards. Always seek sources that are transparent about fees and allow you to see the value of what is being provided.
Look for Accountability
Having an accountability partner can be the most critical decision an investor makes. It’s hard to make all the decisions on your own or try to sift through all the voices on the internet to help make decisions. Being accountable with someone else can help reduce emotions and give someone to talk through issues. This could be a spouse or friend, but it’s also one of the big reasons people hire someone to manage their investments for them. A good advisor will always bring you back to the plan and think through the long-term impacts of any decision that might be made. An advisor may not be trying to beat the market, but they can help an investor to not beat themselves with emotional decisions.
If you’d like an accountability partner, or to hear more about my ideas for navigating challenging markets schedule a complimentary meeting.