New information surrounding COVID-19 and the market is constant. It’s important to quiet the noise and decipher what is important. However, tuning it out altogether and “sticking your head in the sand,” is not the best solution.
The saying, “sticking your head in the sand,” actually refers to the false legend that ostriches stick their head in the sand to avoid a threat. While this may not be what’s really happening with ostriches, this effect is quite real among investors who choose to ignore negative financial information. And this is a classic example of when not knowing can hurt you.
It seems that many people find the stress of threatening financial news more than they want to handle. When this happens, some people can make emotional decisions, which can be very harmful. Others choose to follow this ostrich effect. Some manifestations of the ostrich effect include:
- Ignoring negative fundamental news that can hurt your investments.
- Not recognizing the need to make a change if your current financial advisor is not working for you.
- Failing to fund your retirement account even though you know how important it is.
There are dozens of other scenarios.
When it comes to your investments, we have to carefully differentiate the ostrich effect from investor discipline. The former leaves you open to sudden losses that can destroy your wealth. The latter is a positive behavior once you’ve optimized your portfolio for risk.
A Bear Market Vs. A Recession
As we discuss today’s climate and the current bear market, many of you wonder what the difference is between a bear market and a recession.
A bear market has to do with the stock market, and a recession has to do with the economy. These are two different things but often, they work together.
It is very likely that we see a recession for an extended period of time in the economy as we muscle our way out of today’s environment. But alternatively, the stock market, even though it’s in bear territory, could bounce back quite differently than a recession. So, it’s important to pay attention to the economy and the stock market a little bit differently going forward.
What To Do
At the very least, investors should use this pandemic as an occasion to review their portfolios.
Asset allocation is focused on balancing your portfolio’s risk and reward. The strategy is to hold different asset classes (e.g., stocks, bonds, cash, alternative investments) in proportions that reflect your financial goals, tolerance for risk and investment horizon. Generally, the younger you are, the higher your risk tolerance is, because you have more time to recover from mistakes. However, that’s not always the case. It’s wise to discuss your specific situation with a financial advisor you trust.
If you are near or in retirement, your tolerance for risk might be quite low. But if you’re in your 20s, 30s or 40s, your investment horizon is long enough so that you have a better opportunity to take advantage of long-term stock market returns and the miracle of compounding that can help you increase your wealth and stay ahead of inflation.
Every asset class has its own risk/reward profiles. By holding many different classes, you can take advantage of the fact that some zig when others zag. For example, stocks fall in a recession, but bonds can do quite well.
The Folly of Market Timing
An example of the ostrich effect is the idea that you can nimbly time the market and move your assets around just in time to benefit from new trends. Most investors can’t or don’t do this, which explains why stock markets can panic when conditions change. In effect, investors ignore the warning signs and then, once the market swoons, rush to sell their stocks. This locks in losses and can leave you out of the market when stocks recover.
Asset allocation is designed to avoid the dangers of market timing.
After you’ve worked out your asset allocation strategy, you can further reduce risk by diversifying your holdings within each asset class. This lowers your exposure to individual investments that turn bad.
Working with a financial advisor can help put you in a better position for when a market downturn occurs.
Investors can succeed in many ways. Keeping your head in the sand is seldom a winning strategy. But if you have properly allocated and diversified your assets, you can purposely keep your head below ground and ignore short-term volatility. Over the long run, many find enlightened discipline will build wealth.
These are unprecedented times for sure. Hang in there. PAX Financial Group is here for you. We’re here to talk, but more importantly, we’re here to listen.
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.