The world learned a lot from COVID-19.Financially speaking, 2020 was many investors first real-life experience with market volatility. For DIY investors especially, one of the major financial lessons that has emerged from the pandemic is what market volatility really looks like. And feels like. (Anyone can be a successful investor when the market is good.)
What else have we learned? Here are 5 key takeaways from COVID-19:
Financial Lesson #1: The Market Isn’t Predictable
Many investors try to time the market, but this “strategy” doesn’t usually work in the long-term. If you could see the market dips coming, you could take advantage of the lows and highs, and you might get lucky once or twice by making an educated guess. But unless you have a crystal ball to accurately and consistently predict the future, it’s better to have time in the market than to try to time the market. Read our recent blog post: Time in the Market Vs. Timing the Market: Investment Firm in San Antonio Weighs In.
Financial Lesson #2: Investing is Emotional
Investing is about more than money in and returns out. It’s also about comfort, fear, fortitude and managing all of the behaviors and emotions that come with these feelings.
There is actually a science behind how people respond to money issues; the behavior of investors and markets, and how they respond to different circumstances and occurrences. Check out our guide: What is Behavioral Finance and How Can a Financial Group Help. The important takeaway for DIY investors is that we’re all human and therefore, designed to be reactionary. When you feel extreme emotions like fear or excitement, the fight or flight instinct kicks in, and your survival brain can override your capability for rational thought.
A financial advisor can help you see the big picture and understand your options when your knee-jerk reaction is to take some kind of immediate, impulsive emotional action.
Financial Lesson #3: Your Intuition Can be Wrong
As human beings, we are hard-wired to panic buy and sell. The emotional trigger that shuts down rational thinking can trick us into believing that the best course of action when the market drops is to sell, or to buy after prices have already begun to climb.
The first step to combatting this is simply to recognize it. The next step is to put safeguards in place to prevent you from making rash, emotional decisions, and to help you plan for more strategic financial outcomes.
You may be calm in nature and respond well in times of chaos, but often times, this happens when there’s not much on the line. Really ask yourself if you’ll be able to maintain that calm demeaner if your hard-earned nest egg is at risk. Will you still be able to make smart, educated decisions while you watch your portfolio drop in value?
Financial Lesson #4: Help from a Professional Can be Invaluable
As a financial advisor in San Antonio and co-founder of PAX Financial Group, people often ask me if there’s one simple change they can make to reduce the amount of potential risk in their investments, avoid catastrophic losses or sidestep any big mistakes in the future – Heaven forbid we ever have another year like 2020. My answer: Get help from a fiduciary financial advisor. Someone you trust. Someone who will put your best interest first. Someone who can help you make smart decisions in stressful times.
Unfortunately, we saw many DIY investors make big mistakes during the pandemic. Those who were able to ride out the volatility were rewarded. Having a professional in your corner can help you see the big picture and mitigate risk more significantly. This goes for any financial environment, but especially one that is as volatile as the market in 2020.
Financial Lesson #5: There’s More to Investing than Just the Market
Another mistake we often see DIY investors make is not looking far enough in the future. What is the purpose of your investments? Is it to preserve your wealth? Grow your assets? Protect you from inflation?
If the goal is to help provide for retirement, remember to review your plans, understand how much you need in retirement and what other income streams you’ll have.
In times of market volatility, you may feel like your retirement plans are crumbling right before your eyes. You may panic and want to turn back the clock to start all over again. But that’s not possible – or necessary!
Instead, take a deep breath and remember your long-term goals. Ignore the media, if the news is making you panic into a frenzy. Talk to a financial advisor. Review your risk tolerance. Unfortunately, market volatility is normal and actually necessary for portfolio growth. It typically takes years to accumulate wealth, but it can take just minutes to lock in losses and lose what you’ve created.
Stress-test your portfolio. Review your options. You don’t want to stick your head in the sand and simply hope for the best, but you don’t want fear to drive your decision making either. Remember, ignoring negative fundamental news can hurt your investments as well. Avoid advice that doesn’t have evidence. Evidence is important for making wise decisions.
Ask for help if you need it.
At PAX Financial Group, our financial advisors based in San Antonio, Texas offer holistic financial assessments, investment management and insurance all in one place. Schedule a no-obligation conversation with our team to see how we can help. A simple conversation can go a long way.
This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.