While stock markets may have recovered from much of the pandemic sell-off earlier this year, there are still concerns about a ‘second wave’ of the coronavirus sending business and consumer sentiment back into the gutter.
We understand that the past six months have radically affected people’s day-to-day behaviour and emotions and, should the dreaded second wave arrive, investors will continue to be nervous.
However, one of the most common instinctive behaviours that can sabotage our financial goals is to respond to markets out of emotion. If you make investor decisions based on fear, you may be putting your long-term financial goals at risk. So, what should you do instead?
Stand still during volatile times
We were recently reminded of a sporting analogy that is particularly relevant for financial planning and investing – the penalty shoot-out in football. Taking a penalty is a bit like investing as there is an offset of risk versus reward.
In the context of investing, it’s the decision of the goalkeeper that is most relevant. That is, the goalkeeper can decide to dive either left or right or to stand still during a penalty shoot-out. By diving either left or right, they often feel they’re being more active in trying to save a goal, while standing still could be seen as passive and therefore not trying.
Interestingly, there are studies that show nearly 30% of penalty kicks are directed towards the central third of the goal, yet the number of times a goalkeeper stands still is very low. They often make the wrong choice and the opponent scores the goal.
What’s the lesson here for investors? Statistically speaking, standing still when you don’t know which way the markets will turn is often the best option.
Stay focused on the long-term
We know things have been quite uncomfortable for a lot of investors during the past six months, and we can’t yet see an end in sight for the current pandemic. We do know, however, that one of the best answers when it comes to what to do with your investments is to continue following good investment principles.
Stay focused on your long-term goals and always have a well-diversified portfolio. As we have seen, financial markets are inherently unpredictable and it’s impossible to ‘time’ the market. Even experienced investors can feel uncomfortable staying invested during particularly volatile times, but such discipline normally results in better returns over time.
Keep in mind that after the market fall of 2008, short-term negative reactions in markets were later followed by a much stronger longer-term recovery. If you stay invested, the discomfort you feel should only be temporary. We have already seen the markets rapidly climb after the crash in March.
As we mentioned above, one of the best things you can do is maintain a diversified portfolio. A good financial adviser will help you seek out the shares most likely to generate wealth over the long-term.
Don’t miss out on the best performing days
Understandably, some clients are keen to jump ship the minute markets turn volatile, especially when there’s no end in sight for something as significant as a pandemic.
However, keep in mind what you risk losing if you miss the best performing days. As you can see below, if you miss the best five days during a bull market, you could lose thousands:
Stick to your plan
It’s important you don’t lose sight of your long-term financial goals and rush to make decisions based on emotion. Selling in a hurry or withdrawing from the market completely is the wrong thing to do. Especially if you planned to be invested in the long-term.
While talk of a possible second wave of the coronavirus is unsettling, one of the biggest challenges to our financial success is often our own instinctive behaviours.
Doubt, fear, procrastination and overthinking are normal coping mechanisms when we’re faced with uncertainty. After all, we’re only human. However, our instinctive behaviours can prevent use from taking action or drive us to make bad financial decisions.
That is why having a financial plan and the discipline to stick to it is essential. And keep in mind yet another sporting analogy that applies to financial planning and achieving your financial goals: investing is a marathon, not a sprint.
