People get into trouble when they let their emotions destroy their financial plans, like when they let fear push them into panic selling their investments during a stock market free-fall. This is similar to and related to the COVID-19 panic now disrupting lives and markets worldwide.
The way that we, as investors, react to investment performance can freak us out and overwhelm us to the point that we devastate any possible chance for investment success. We panic during market downturns and chase the hot fund in our portfolio when things are up. These moments that make us human and normal are also the most formidable challenge we face in achieving the sort of investment success we strive for. We can’t control the markets. But we absolutely can control our own behavior.
3 Pieces of advice for investors during this Time of extreme volatility:
Instead, look at the facts. Every single market correction in history has been followed by a more powerful and, ultimately, permanent upward climb…In fact, since 1946, the stock market has lost 20% about once every 5 years! Despite that, every single 15-year period in the stock market’s history has ended up and the stock market as a whole has increased over 150 times over that same period. “This time is not in fact different, and the world is not coming to an end,” Gideon says. “Our reaction to the market correction is more damaging than the market correction itself.”
Have a Real Financial Plan
“Your portfolio is NOT the plan,” Gideon says. “A real financial plan is one that defines and depends on your goals, your investment time horizon, your income and your expenses. Having a comprehensive plan prevents ‘freak-out risk’ and ensures that you won’t fret about temporary corrections.” In fact, you will realize that market corrections are actually a huge opportunity to buy great companies on sale!
Know the purpose of your investments
Every dollar you spend has a specific purpose. Well, so should your investments. Segmenting assets by time horizon (when you ultimately need to spend down the money) means that you won’t be fazed by market volatility. Having placed your assets into your Now, Soon, and Later Buckets means you will be prepared to take risk where you should while protecting the assets where you must.
A word of caution: “Achieving long-term investment success has nothing to with outsmarting the stock market or speculating on the short-term market outlook,” Gideon says. “Investing in the stock market as a whole (not even trying to find the “best” stock, sector, or fund) and then staying the hell away from your statements has historically resulted in better than a 7 percent annualized return.”