At the time of this writing, our country is currently in the middle of a pandemic and the hardest part for many people (including myself) is doing nothing. We should not be going many places. We should not be hugging people. We should avoid touching our faces. And our investments.
One of the most tempting things to do when the market is in a free-fall is to take dramatic action. While there are strategies that one can take when the stock market is dropping – tax-loss harvesting, dollar-cost averaging, and rebalancing – the most important action to take is to stay put. Don’t try to get out and get back in, attempting to avoid the lowest days in the market. Many people think they have a perfect NCAA bracket in March, only to have their hopes crushed by April. Many addictively play the lottery because “someone has to win,” only to see their hard-earned money never returned. Trying to time the market, just like a perfect March Madness bracket or winning the jackpot, is impossible to do, especially year after year. Someone may have timed the market successfully once or twice, but no one in the history of humankind has timed it perfectly with continued consistency.
Say you were to sell your stocks today and to hold cash while the stock market plummeted over the next several weeks. Would you have sold at the bottom or at the top? How would you know? Would you be able to buy back into stocks when they hit their lowest prices? Would you be able to act swiftly if there was a surprise rebound? How much of a runup would you be willing to sit out of to ensure that you were missing a false positive before it fell lower? Even if you were able to get out at the right time, would you be able to enter when the market was lower than when you exited? Making these kinds of guesses with your life savings at a time of intense market volatility involves a super-human kind of insight and emotional fortitude. We all have inherent behavioral biases that work against us, so instead of trying to do the impossible, simply choose strategies that will grow your wealth substantially more than market timing: live below your means, invest for the long run, manage your risks, and diversify your investments.
Spending less than you earn is not complicated, but it is powerful. If you spend more than you earn, you are planning on running out of money. There is nothing wrong with spending a lot of money, just make sure that you have the income and/or assets to support it. If you want to grow your wealth, you must control your spending.
Investing on a long time horizon can help minimize worrying about buying low and selling high. Tring to time the market may lessen an investor’s portfolio’s long-term potential. In 2013, Fidelity conducted an internal study that demonstrated their best-performing accounts were accounts of dead investors! The accounts that had been left alone, untouched, for years, yielded the best results.
Risk management involves having the cash on hand that you need for emergencies; Pathfinder typically recommends 3 to 6 months of living expenses. It also involves being adequately insured, should you become disabled or die prematurely. Managing your risks helps to ensure that a health issue, job loss, or financial emergency won’t disrupt your long-term wealth-building strategy.
Diversification is spreading your assets among different asset classes and market sectors. Pathfinder typically recommends holding no more than 5% of your portfolio in one security. Of course, that one stock could see significant gains, but will the discipline to sell overrule greed at the right moment? There’s also the possibility that a bread and butter stock could also plummet. You don’t have to look far back in history to see the disastrous effects of Enron and the tech bubble.
Wealth accumulation does not require you to have a PhD in finance. It does require the wisdom of knowing that the future cannot be predicted and focusing on the things within your control. This may sound boring and unsophisticated, but it is how we have worked with our clients to help grow their wealth for the last 15 years. Our clients are disciplined savers and we remain principled in our investment strategy, not gambling with their money but focusing on time-tested wealth building strategies. At Pathfinder Wealth Consulting, our wealth advisors are CERTIFIED FINANCIAL PLANNER™ professionals, meaning they are professionally bound by the fiduciary standard of putting our clients’ interests ahead of their own. On this accord and using the strategies discussed, we believe we have been a part of our clients’ success and can help do the same for you. We are here to guide you forward.
Past performance is no guarantee of future results. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any investment product. Please contact your financial professional for more information specific to your situation.