On December 31st, 2019 reports emerged from Wuhan, China that a new and deadly virus had surfaced. Since that day it is safe to say that the Covid-19 virus (Coronavirus) has wreaked havoc on the lives of us all and at the same time turning the economies of countries including the US, upside-down almost overnight.
I have often said that what separates average investors and the great ones is how they make decisions when the markets become volatile. With education and understanding comes great discipline. There is an actual science around disciplined investing which has always been the easiest and most probable way to be successful in the markets long term.
The following is a list of 3 things you SHOULD DO and 3 things you SHOULD NOT DO during market volatility to be or become a disciplined investor.
DON’T #1 – Get out of your seat –
It is inevitable that even investors that have been disciplined enough to hold out this long are still plagued with thoughts of getting out of the market and going to cash. As has been proven through endless academic published analysis the WORST thing an investor can do is go to cash when the market is volatile. Below is a graph showing the market returns vs “average investors” returns. These HUGE gaps in missed returns are driven by investors emotionally pulling money out of the market when it is volatile.
To quote two of the brightest minds in investing regarding this concept:
Eugene Fama - Recent PULITZER PRIZE winning laureate of economics for his studies on the market. “Your money is like a bar of soap, the more you handle it the less you have of it.”
Warren Buffet – “The market is the greatest instrument on Earth from transferring wealth from IMPATIENT people to PATIENT people.”
DON’T #2 – Information Overload from the Media –
The reality is that the media is driven by ratings. The best way to get people to “tune in” is usually driven by fear which can lead to hysteria. In no way shape or form is this to undermine the severity of the current situation, but it is to note that too much media especially these days can drive the most logical person to madness. A constant feed of “doom and gloom” can lead to emotional decision making which can get people in trouble especially when it comes to investing. I tend to rely less on the media and more on what is happening in the world around me. China has achieved a near “back to normal” environment and the facts point to the idea that they handled this epidemic less than reasonably compared to the US. This gives me great hope that a quicker turnaround for us is on the horizon. Don’t forget to take a break from the TV and Internet.
DON’T #3 - Overanalyze your Investments –
When the markets are volatile, we tend to overanalyze performance. When times are good it can be months before we read our investment statements, but when there is turbulence, we can find ourselves analyzing our investments by the hour. This is a horrible idea. Imagine you decide to go on a long boat trip. You have spent months putting together a plan ensuring that the boat you have purchased for the journey can withstand the possibility of storms. Days into the trip you run into an evening storm. Based on the weather report you know it will be blue skies and sunshine in the morning. It still does not undermine that you are a little uneasy about the storm, that’s reasonable. You have two choices; you can stay up all hours of the night regularly going out into the storm to analyze what is happening minute by minute. Or in your confidence with the plan and the boat you can go into the hull of the ship, relax, do some reading and sleep to wake up and enjoy the blue skies in the morning.
DO #1 - Consider Investing More –
We have ALL heard the saying “Buy LOW, Sell HIGH!” Yet study after study shows the average investor does exactly the opposite. When the markets are high investors put more in and when the markets are low investors pull their money out. Think about it this way; if you found out that your home’s value had reached its lowest point you would never immediately run out and put your home up for sale. So why handle your investments that way? Yet the average investor does exactly that with their investments. It is in times like now that investing more money is a good thing to consider and that buying into the markets when they are low will benefit and take advantage of the most recent correction as it rebounds.
DO #2 – Conversions –
In 2010 legislation allowed for any person regardless of income the ability to “convert” any portion or all of their pretax accounts (401k’s and IRA’s) into tax free investments like ROTH IRA’s. This concept could be applied by “converting” a portion of your IRA into a ROTH IRA which will incur taxes on the amount converted, then moving forward the money grows TAX FREE. The application here is that you pay taxes on a lower amount due to market losses and moving forward as the market rebounds the growth you would receive is tax free as opposed to taxable. With current tax rates at historical lows this concept could help maximize your net returns and at the same time reducing long term tax liabilities.
DO #3 – Revisit your Advisor Relationship –
In all “relationships'' I have found communication is the most important aspect. At Financial Strategies Group we as a firm are committed to communicating with our clients regularly both in the good times and especially during the turbulent times. It is our goal with everyone that we work with that we educate them to become disciplined investors so that they are confident in their expectations that their long-term goals are met. We also take great pride in converting our clients from “average investors'' to great investors through understanding and discipline. How has communication been in this period of volatility with your current advisor? Are you confident your advisor understands your goals, objectives and the appropriate risk you are willing to take with your investments? If you cannot answer these questions confidently it may be time to reassess who is helping you navigate your financial plans.
I heard a saying once “Without rain, nothing grows. Learn to embrace the storms of life.” Sometimes this is easier said than done, but I believe with understanding and confidence you can be or become a disciplined investor. Like ALL market volatility in the past this time shall pass and for many of us we will tell the stories of the things we did and maybe the things we should not have done. Storms have come in the markets and will continue to come sometimes when we least expect it, but it is those who make informed and educated decisions that find success and opportunities in the storm.
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This commentary on this website reflects the personal opinions, viewpoints and analyses of the Financial Strategies Group, Inc employees providing such comments, and should not be regarded as a description of advisory services provided by Financial Strategies Group, Inc or performance returns of any Financial Strategies Group, Inc Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Financial Strategies Group, Inc manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Written by: Ronnie Thompson