During Times Of Uncertainty, Focus On What You Can Control
Current headlines and news stories can be pretty discouraging. There is a lot of fear and worry about what the future holds for our world and our economy. Many people are concerned about their personal finances.
We feel helpless and unsure of what we can do to help the situation. So, we turn to what we can control, our own financial strategies.
While now can be an important time to evaluate your investments, be careful. Verify that it’s not just emotions driving your personal financial decisions, but logic too.
Here are some things to consider when markets are down and unstable:
1. Donate Wisely
Many people want to help. They are donating to assist refugees and war efforts in Ukraine right now. However, be careful to vet the organization you are donating to. There have been cases of fraud when donating to some charities.
Scammers see an opportunity as there are millions of dollars being sent to Ukraine. Or, the money may not get to the people you intend (or as quickly as you might hope). And, while the donation is the priority, it doesn’t hurt to get a tax deduction if you donate to a 501(c)(3) charity.
Get a charity recommendation from a source that you trust. Verify if someone has already vetted that charity or spend time doing the research yourself. When all else fails, reach out to a registered investment advisor, too.
2. Be Prepared
These kinds of events often remind us that we could be more prepared in case events get worse. It reminds us that the world is full of unknowns. So, we should be prepared for what could come in our future.
Here are some ideas to be more prepared:
- Have an emergency fund. This is usually 3-6 months of expenses. You should keep it in an easy-to-access account. We like high-yield savings accounts because you can get a little interest on this money.
- Keep actual cash in a safe place at home. If the internet or power is down, you may not be able to use debit or credit cards. Consider enough for 1-2 weeks’ essential expenses.
- Have food and water storage. We saw what happened at the beginning of Covid when store shelves cleared out. There have been several news stories of Ukrainians living on the food they had stored as supply lines are cut off.
- Have an emergency kit. This should include medications and a light source.
3. Don’t Sell Out of Investments While the Market is Down
If you sell stocks when the market is down, you are locking in your losses. Market prices change every day, so that isn’t optimal retirement planning.
In the short term, the market may be down, but over a long time period, the market is typically up. See this article on how markets have done long term after a geopolitical event.
If you are selling because you are nervous, please pause and think: Long term, you still need to be invested in the market to fight inflation and build your retirement account.
So, when do you get back in? Many people struggle to get in at the right time, especially if they are investing from emotion. Small business owners may have to reevaluate their financial plans carefully, too.
The stock market is usually a leading indicator. In other words, it’s going to start having a recovery long before the headlines get positive. And if you sold low when the market was down, you could wind up buying back in at a higher price.
Timing the market is difficult because you need to make two good decisions: Getting out at the right time and getting in at the right time. Studies show that as humans, we rarely get both decisions right.
Academic studies on investing suggest that instead of trying to be an expert market timer, you should build a good, diversified investment portfolio. Advisory services can definitely make that easier.
Match your risk tolerance with your time horizon and then hold on. Ride out market volatility.
4. Put Cash to Work When the Market is Down
Do you have extra cash? When markets are down, that may be the time to invest.
You can buy in at lower prices. On the other hand, it can be harder to invest when you are nervous that the market could go lower.
This is where a good financial advisor for entrepreneurs can help you create a strategic plan on how and when to get into investment. Over the long run, the markets are up, see this article by Dimensional Funds.
By evaluating your financial goals and time horizon, you can create an investment plan. If you have a wise plan, you can let logic—and not emotion—run your investing decisions.
It’s unclear when the right time to invest is. The news makes it seem like investments and markets have fallen off a cliff. However, as of the day of this writing, the S&P 500 is still up 5.14% for the one year, even though it is down 13% year to date.
It’s difficult to know when we have hit the bottom. You can use a strategy, like dollar-cost averaging, to be systematic about investing and take the guesswork out of it. Many people try to time the bottom of the market.
They sit on the sidelines, waiting for the world to appear sunny again and the doomsday feelings to pass. In the meantime, they have already missed their chance to buy low. We saw this during the market dip in March 2020 (due to Covid).
The market dipped… and then, almost immediately, it started climbing again. You had a window of only a few days to buy in at the market low. And those days were right at the beginning of Covid; with a lot of unknowns and some pretty bad headlines.
Many people had difficulty pulling the trigger to invest more during those turbulent first few weeks of the pandemic. You did not have to buy at the lowest point to take advantage of the Covid market recovery.
If you had dollar-cost-averaged into the market over 3 months from March to May of 2020, you would have bought in at significant lows. You would have been invested during the recovery months, too. That’s a good financial strategy.
5. Rebalance Your Portfolio
You don’t have any cash flow to invest, so you can’t take advantage of low market prices? Here’s a tip: You may have bonds inside of your portfolios that could be repositioned into stocks, buying in at low prices.
Be careful: The reason most people hold bonds is as a buffer or to add some safety to their portfolio. So, spend a little time and energy to evaluate what role bonds play in your investment goals and time horizon.
Now could be a great time to use bonds to buy into the low prices of the stock market. Or, it could be unwise to take additional risks. It all depends on your situation, so contact your Rock House financial advisor today.