Here’s one thing financial advisors don’t appear to be sweating: a 2016 stock market meltdown.
Despite the market’s rocky start to the year, more than 150 of 200 financial professionals who responded to a survey by NerdWallet earlier this year say they think the Standard & Poor’s 500 index will end the year flat or in positive territory. Another thing not weighing heavily on the minds of respondents? The potential that a recession will send the U.S. into an economic tailspin in 2016.
So what does keep financial advisors, tax experts, credit counselors and wealth managers up at night?
There’s nothing to fear more than fear itself
Of all the things that can threaten an investor’s confidence — economic uncertainty, global turmoil, election-year shenanigans — what scares financial advisors the most is the emotional state of the person sitting in their waiting room.
A client’s response to market volatility can be one of the biggest threats to their financial well-being. The reactions advisors say worry them most are:
Panic sellers: Seeking short-term comfort is a natural reaction when you see your portfolio take a sharp turn south. But panic sellers risk missing out on gains when a down cycle for stocks reverses direction. Data from Fidelity about investor behavior during the 2008 financial crisis show that the portfolio returns of those who bailed out of stocks shortly after the crash and remained on the sidelines through March 2010 lost an average of nearly 7%. Those who stayed the course saw their average balances rise roughly 22%.
Savers frozen by fear: It’s the continual addition of money to an account (dollar-cost averaging) that keeps the wheels of compounding rolling and smooths out long-term returns. But jittery investors are more apt to abandon this key part of the wealth-building equation. “The volatile market and fearful outlook are giving clients the mental excuse not to continue saving and investing according to their plan,” says Brian McCann, principal at Bootstrap Capital LLC in San Jose, California.
Daredevils who “buy low” no matter what: In contrast to those seeking cover in cash are those driven to take excessive risks by blindly buying stocks that have dropped. Buying based solely on price (and without knowledge of a company’s intrinsic value) is taking an uncalculated risk — no matter what the market conditions.
Clients who think that “this time it’s different”: “Many people are letting short-term volatility influence their long-term decisions, even though volatility is normal and should be expected when investing in the stock market,” says Joe Allaria, a certified financial planner at Visionary Wealth Advisors LLC in Edwardsville, Illinois. The danger of recency bias — giving more weight to what has happened recently than to how things have gone historically — is that it can drive investors to abandon strategies that were put in place during calmer times.
People focusing on the wrong metrics: Worrying about monthly, quarterly and minute-by-minute performance is a distraction from what really matters: how on-target you are to reach your long-term goals. If you can’t resist checking up on your returns, at least do a proper portfolio checkup. Compare the performance of your investments with the appropriate benchmark, and make sure your allocation is still aligned with goals and risk tolerance.
Fluctuating time horizons: “Time heals all wounds” may be an overused cliche, but that’s because it’s true — especially when it comes to investing. One of the biggest mistakes people make is not realizing how long their time horizon really is, says Marc Smith, financial advisor at Red Wave Investments in Dillsburg, Pennsylvania. “Life expectancy keeps increasing, and even someone who is 60-plus years old likely has another 20 to 30 years to live. Maybe more. This means more people have the time to ride through the ups and downs of a market.”
Regardless of whether you are a client, every investor should heed the things that scare financial advisors the most — and strive to avoid succumbing to fear.
This article was written by NerdWallet and was originally published by USA Today.