In a volatile stock market, you may be feeling like you need to take action, but then your financial planner tells you to just do nothing!
To help you channel that desire to do something, here’s a list of very good things to do right now that can help ensure you are protecting your long-term financial outlook.
- Ignore the Market. The financial media outlets have a vested interested in tugging at your emotions. Watching the market too closely can lead to the false belief that you know where the market is headed. The most recent market gyrations do not mean that it will keep going down or that it is poised to suddenly come roaring back. So, you should deliberately limit your consumption of financial news during these times.
- Maintain Perspective. The stock market isn’t your portfolio! While the S&P 500 index may be falling, most investors have a diversified portfolio composed of a blend of different stock categories and bonds. So, the market movements that hit the headlines likely don’t reflect what’s happening in your portfolio. In addition, there are other sources of economic value that you must not forget about: cash on-hand, your long-term earnings potential, Social Security benefits, pension income, and the value of your home.
- Control What You Can. You have direct control over how much you spend and save, what you pay in investment costs, taxes generated by your portfolio, portfolio diversification, and your own emotional reaction to market volatility. Focus on these and instead of “going to cash” or other moves to safety since it is likely too late for such tactical changes.
- Get Advice. Before acting on the stress and anxiety caused by the current market volatility, talk to your financial planner to coach you through this decline. It is essential that you avoid reactionary selling in down markets. The losses you see reported in your account statement are not yet real (realized). Your financial planner can help you sort out changes that can help from those that can hurt.
- Check Your Emergency Fund. Make sure you’re ready for the possibility of lowered income or even unemployment. A large cash reserve (your Emergency Fund) is your best defense. You should have 3-6 months of your living expenses (not including what you’re putting into savings) held in a liquid and safe savings vehicle (e.g., FDIC/NCUA insured savings account or short-term CDs). If you don’t have enough cash raised, you should see Get Advice above to ensure you are taking money from the most advantageous assets in your portfolio.
- Check Your Risk Tolerance. Market downturns are an important checkpoint on your real tolerance for risk. Everyone likes risk when the market is rising. It’s the declines that expose our real feelings about losses. Be sure to write down your thoughts so you can review them after the current market volatility subsides. And be sure to share these thoughts with your financial planner.
- Diversify, Diversify, Diversify. As you make additional investments, you should avoid individual stocks and sector-specific funds. It’s very likely the broad stock market will bounce back, but there’s no guarantee specific investments or investment categories will rebound in the short or intermediate terms. There’s just too much uncertainty during these types of market events to be placing concentrated bets.
- Refinance High Interest Debt. Thanks to the significant drop in interest rates, refinancing high interest debt can help your long-term financial outlook. You should be careful of closing costs and whether the new debt being offered is a fixed or variable rate (hint: don’t pick variable rates unless your payoff will definitely fall within the fixed period of the variable rate offering). This is another item on this list where you might benefit from talking to your financial planner.
- Portfolio Housekeeping. If you have individual stocks and/or mutual funds that you have been planning to sell, but you’ve been holding off because of the tax consequences, the market downturn may have turned your gains into losses. Ordinarily this would be bad news, but this could afford you the chance to unload these unwanted investments with low/no tax consequences.
- Consider the Future You. Think about your financial circumstances in 10 years and what your future self would think of the investment decisions you’re making today. Would he or she want you to react to this volatility by locking in losses while ignoring the above concrete steps you could be taking now? Probably not!
Note: Not all these actions apply uniformly to all investors, so be sure to review these actions with your financial planner if you have any questions or concerns about whether they apply in your case.