You may have heard discussion in recent news of the uncertainty in our economy as a whole. The downward trend in the stock market, gas prices reaching an all-time high, and increasing inflation are some of the pivotal factors promoting uncertainty and fear in our economy. It can feel worrisome to see your retirement account dwindling or your expenses rising due to inflation, all while your income stays the same. I want to address some of these fears and offer some simple, actionable habits you can implement to reduce your fear and worry.
First, do no harm
If you are in the medical field, you may have seen this phrase before, but what does it have to do with stocks? A good rule of thumb is to avoid making panicked decisions. Do not run to sell your portfolio in bad times. Do not run to buy during good times. Before you make a decision you may regret, step away and do something that brings you peace of mind. Take a walk around your neighborhood. Get a manicure. Spend time with family and friends.
Know your risk tolerance
Everyone is different. Each person brings a unique level of risk tolerance to the table based on their personal financial situation. Financial risk in your stock and retirement portfolios can evoke many uncomfortable feelings. When the market goes down, it may bring up emotions such as fear, greed, and even sadness. A quick mental exercise to practice when considering your risk tolerance is to think through a few pointed questions. What would you do if you lost half of your net worth? How would it feel? Would this feeling be too much to bear? If so, your portfolio is too risky. Consider allocating more money into safer investments that do not have as much market risk. You can repeat this exercise for any type of market downturn.
Buy low and sell high
Have you ever heard of this principle? It is one of the easiest and most common phrases to utter, but one of the hardest phrases to put into practice. The ability to time peaks and valleys in the stock market is next to impossible since there are innumerable factors that exist which can cause a single stock or the entire market to shift up and down. Because of this uncertainty, I like to rephrase this popular saying with a slight twist: Buy Low-ish and Sell High-ish. In short, keep the risk tolerance you established in mind, work with a trusted financial advisor, and ask yourself questions like:
“What am I invested in that is doing well?”
“What am I invested in that is doing poorly?”
“What am I invested in for the long-term that I would like to own more of?”
“What am I invested in for the short-term that I can live without?”
“Do my investments match my risk tolerance?”
“Do I have a rainy day fund to buy things that are priced low?”
“Am I ok with selling this position at a gain even if I am selling a little early?” – TOUGH
Update your personal financial statement
Your personal financial statement is simply a snapshot of your finances at a specific point in time. Think of your personal financial statement as the mountain top view of your assets and liabilities. You can see asset classes you currently own (e.g., stocks, retirement), as well as asset classes you would like to own, such as real estate or land. You may also see your debt, like student loans or credit cards, that you would like to pay off ASAP. While helpful, having a financial advisor is not a substitute for taking a moment to understand your financial position. It is a good idea to keep an up-to-date personal financial statement on file as a part of your personal finance routine 1-4 times a year.
Check and update your budget
Budgeting can be summed up as the difference between what you estimate that you will make and spend in a month versus what you actually make and spend that month. Here are some basic steps you can take to sort this out. First, update your personal finance statement. Second, complete a budget. Third, set goals. Why is goal setting last? Let’s look at an example. Imagine you have a goal set to save $1,000 a month for a home in the future. You begin to budget and realize that after your salary, retirement, insurance, rent, utilities, food, entertainment, and other expenses you only have $900 a month left over. In this example, your goal was admirable, but not attainable. When you have a budget, you are able to set goals that are realistic and tailored for your unique financial situation.
Tip: update your budget when prices of goods and services are rising. Currently, gas, food, and grocery expenses have risen compared to six months ago.
Check your retirement goals
Ok, the market is down. While it is not fun to think about your retirement savings crashing down to earth, it offers the opportunity to reevaluate your retirement goals. Consider increasing your retirement contributions or diversifying your risk so that you have increased or decreased exposure based on the risk tolerance you’ve established for yourself. Now is a good time to start asking your financial advisor questions to ensure you are prepared for retirement, regardless of whether the market is up, in a recession, or in a depression.
Choose a financial advisor
Risk tolerance, buying low, selling high, decisions, personal financial statements, budgets, retirement, plans, and goals? All of this while the market is down? This proves the importance of a good financial advisor to help you reinforce and strengthen your financial status, plans, and goals. Two things to consider: maximizing your time and when to find a better advisor. Your advisor is not only helping you, but also advising other clients. To get the most from time with your financial advisor, go in with an up-to-date personal financial statement, budget, and a list of goals and plans for yourself. Your advisor will be able to skip through the basics and quickly get to the content that matters. If your financial advisor is not asking you questions about your finances, pick a new one. If he or she does not offer changes and recommendations based on these volatile market conditions, pick a new one. If he or she provided no recommendations when COVID-19 was happening in early 2020, pick a new one.