Investing - Stay the Course
With the current situation we are experiencing with COVID-19, many of us are adapting to the daily changes. If you have watched the news recently, you have probably noticed that the stock market has also been negatively impacted. I wanted to share a few brief tips on how to invest in times of uncertainty with the goal of easing your concerns about your financial future.
Stick to Your Long Term Plan
We want to ensure that we are investing with a goal in mind. This could be preparing for retirement, saving for kids’ future education, or working towards financial freedom. Once we have a goal, we can then determine how to invest our hard earned money. The two most important factors are:
• Time horizon
• Our personal comfortability with risk (price fluctuation in our portfolio)
For example, if we are saving for retirement and it is over ten years away, we have a long enough time horizon to handle some ups and downs in our portfolio. However, if we will retire in the next few years, we want to invest more conservatively since our timeline to use the money is shorter.
We should also have proper expectations on the potential upside and downside of our investments. The more risk we take in investing, the increased potential for higher returns, but also larger decreases when the market is down. As long as we understand how our investments should perform in both good and bad situations, we will feel more confident in our long-term plan. Overall, we should decide with a focus on our ultimate goals instead of based on short-term circumstances.
Avoid Making Rash Decisions.
When we see our accounts go down in value, it is very easy for fear and panic to set in. In fact, it is quite a normal response. Much research has shown that it hurts more to lose one dollar than it feels good to gain one dollar. While our minds are programmed this way, we have the control to determine how to respond and make sound decisions. Look at the charts below.
If you look at the price of the investment in the short term, it can look very confusing and is difficult to predict.
It can currently feel like we are in a situation like the chart shows here, where it seems the market may continue to fall. Many people get caught up in their fear and panic and sell at this point which guarantees their loss (bought at $15 and sold at $5 for a $10 loss).
This chart simplifies things. Over the long run, the stock market goes up as companies generate more revenue. The person who maintains their long term investment strategy and does not make a hasty decision in the short term will have better returns and have a higher rate of success at achieving their future financial goals.
Talk to Your Financial Advisor.
At the end of the day, you should feel comfortable with your investments. I suggest understanding what you own, why you own it, and what it costs. This is a great opportunity to have a conversation with your financial advisor to ensure that you are still on track to achieve your financial goals. Even if your portfolio is down in the short term, what matters most is that you are on pace for what matters most to you, whether that is retirement, paying for your child’s education, or financial freedom. Your advisor will be able to answer all of your questions and concerns to make you feel comfortable even when things seem bleak.
