Navigating the New Reality
Keeping the ‘Corona Crash’ in Perspective. Every stock market crash starts with a triggering event – a shock (e.g., coronavirus, 9/11) or stretched valuations (e.g., the dot.com bubble.) Trigger events cause investors to become fearful and they start selling. This selling causes prices to decline which feeds the fear. They sell more until we get a series of steep declines punctuated by a few strong gains. Eventually the fear abates, investors start picking through the wreckage to find bargains and prices start to rise.
Practice social financial distancing. If you sell now, you will lose money and miss the benefit of future market rallies. If you have a long-term plan, follow it. Your plan might go against the advice given by friends and “experts.” There is pain in going against the crowd, but they are not you, their goals are not your goals and their financial situation is not the same as yours.
You Can’t Control Much, but You Can Control Your Cash Flow. Many financial planners will discourage making changes to your investment portfolio during market volatility and may even recommend not checking your account balances since that could cause more fear and panic. But that doesn’t help satisfy your brain’s desire to do something to ease the fear, so look at what you can control. On the spending side, find ways to free up cash flow. Identify things that you can cut or eliminate. On the savings side, increase the contribution to your retirement plan, 529 college plan, and HSA account.
Hindsight is 20/20, but Being Proactive is the Next Best Thing. Just as loss of earnings due to unemployment or a health emergency is - and always has been - a risk, the possibility that equities could suddenly drop due to a pandemic, terrorism, war, civil unrest and a myriad of other reasons is nothing new. All these things should be factored into your financial plan and the portfolio construction process. Planning requires time and effort, but at times like these, the rewards are clear.
Although we are navigating a new reality, make educated decisions instead of acting out of fear. We are always available to help!
Adapted from the Financial Planning Association’s® (FPA®) ebook, Navigating the New Reality: COVID-19, Market Turmoil and Your Well-Being.