Financial advisors, tax experts, credit counselors, wealth managers and other money pros are worried.
They’re worried about your frame of mind. They’re worried that the stock market’s rocky start to the year is driving investors toward financial self-destruction.
Of course, they’re also worried about things like geopolitical instability and weakening emerging markets and how they’ll affect portfolio performance. But when we polled 200 members of our Ask an Advisor network about a variety of subjects including politics and their predictions about the Standard & Poor’s 500 returns, it was investor fear — their clients’ inability to cope with recent market volatility — that stood out as the big threat to investment returns in 2016. (Read the full results of NerdWallet’s Advisor Sentiment Survey here.)
Panic selling, market timing, long-term investing memory loss and more
These are among the self-inflicted investing injuries financial advisors say they’re seeing more of in recent months.
Financial advisor Phillip Christenson at Phillip James Financial in Plymouth, Minnesota, says recent stock market volatility has driven many investors to move allocations away from stocks, reduce their exposure to hard-hit assets and even cut back on planned contributions.
Actually, you probably should do the opposite of all of that.
So, how do you stay the course when you’re in fight-or-flight mode? Here are eight suggestions for surviving whatever else 2016 throws our way.
1. Ignore the hype
We know, it’s easier said than done. But the more you can tune out the noise, the less tempted you’ll be to let short-term market news influence decisions you make with your long-term investing plan. The same goes for letting today’s political hype and November’s election results drive decisions about dollars invested for decades from now.
Based on NerdWallet’s survey results, more than 87% of respondents say they’ll leave politics out of the portfolio management equation. Steve Swicegood, president of Conscious Money Solutions in Amarillo, Texas, says individual investors should, too.
“The fundamentals of long-term investing don’t change from party to party,” Swicegood says. “The road to prosperity does not belong to any politician; it belongs to those who spend less than they earn and consistently save and invest at least 15% of their income.”
2. Resist trying to time the market
Tax consequences and investment fees aside, bailing out of stocks before a slide only gets you halfway toward successfully timing the market. The other important half is reinvesting your money right when the market starts its recovery.
Investors who sold their stocks after the late 2008 S&P 500 bloodletting barely had time to take a breather before the market reversed course. Anyone who still lingered on the other side of the exit door from March 2009 through September 2009 missed out on the S&P 500’s 50% gain during that period.
3. Make a plan if you don’t have one
People who have a financial plan in place — one that includes a road map to achieve short-, mid- and long-term goals — are more likely to stay on course and get to their destination intact.
Although there’s no bad time to start putting an investing plan together, now happens to be a particularly good time, says financial advisor John Brandy of Open Mind Generations in Redmond, Washington: “More customers jump on the bandwagon when markets are flying high, but the smartest customers jump on when things are cheap and they have the money.”
4. Focus on the results that matter most
Times like these test the mettle of even the most prepared investors, and Advisor Sentiment Survey respondents reported that even those clients worry about the here-and-now and forget about the more important bigger picture. The biggest mistake investors are making, says Elliott Weir, a financial planner at III Financial in Austin, Texas, is “focusing on short-term market movements instead of how ‘on-target’ they are for long-term goals.”
5. Resist making changes just for change’s sake
In moments of doubt and discomfort, often the best move is to make no move at all. “If there’s already a plan in place, we find that very few changes need to be made to the portfolio, because we were investing to drive the success of the plan to begin with,” says Stephen T. Hart, a wealth strategies analyst at Talis Advisory Services in Plano, Texas. “By putting a plan in place, we can show clients how a long-term investing mindset will drive overall success.”
However, if you do feel the need to tinker:
6. Make the right adjustments to get back on track
Don’t underestimate the amount of time you have to recover from a down year. In fact, use time — and compound interest — to your advantage. Use NerdWallet’s retirement savings calculator to see how much you stand to gain by tweaking your saving and investing plan.
You don’t even have to make sweeping changes to the way you save and invest to get results. Things like saving just half of your raises or work bonuses or moving money out of a high-fee mutual fund in your 401(k) to a lower-fee option can dramatically boost your retirement savings. (Here are some small changes that deliver big financial results.)
7. Keep doing what you’re doing
Market turbulence needn’t be a dark chapter in your financial life. Dips are an opportunity to make your investing dollars go further and not merely hold on for dear life.
Simply staying the course and continuing to contribute to your long-term savings fulfills the first — and most important — half of the classic “buy low, sell high” investing mantra. In technical terms, by continuing to invest, you are dollar-cost averaging. By investing set amounts at regular intervals, you’re getting more shares of stock, mutual funds or exchange-traded funds when prices are low — and you’re smoothing out your overall investment returns over time.
8. Take advantage of market turbulence
Even better for your long-term success is mustering up the courage to contribute even more to your retirement fund in times of turbulence. You’ll be following in the steps of bargain shopper and Berkshire Hathaway Chairman Warren Buffett. In markets like we’ve seen so far in 2016, Buffett looks to add to his positions in high-quality companies whose stock prices have suffered from collateral damage.
If you find yourself being wooed by the doomsayers who insist “this time is different,” consider these words from the Oracle of Omaha in his 1992 letter to Berkshire Hathaway shareholders: “Don’t pay attention to prognosticators. We’ve long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie (Munger, Berkshire Hathaway vice chairman) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”
Image via iStock.