The unprecedented events of the past few months have had me riding an emotional rollercoaster. Regardless of which political party you identify with, I bet you feel the same way. In October 2020, The American Psychological Association reported, “In 2020, more than three-quarters of Americans (77%) say the future of our nation is a significant source of stress, up from 66% in 2019.” I can only imagine what that number might be after what occurred last week.
It’s inevitable that some of this emotion will bleed over into your thinking around the direction of the markets. I’ve had more than one discussion with family and clients around the tax and market implications of a Biden presidency, now coupled with a Democrat-controlled House and Senate. And what about the ongoing civil unrest? Do we sell now? Sell later? Or hold?
The securities markets may continue to reflect the impact of further government stimulus activities and the resultant liquidity into 2021. Or the markets may be spooked by higher expected taxes for corporations and individuals. These factors would lead to different conclusions as to which direction the markets will be heading. Oftentimes, especially during this past year, they appear to be detached from the real economy and the impactful politics of the day. In fact, on the day chaos reigned in D.C. on January 6th, the stock market indices…wait for it…rallied?! Market timing should be avoided by a long-term investor.
Which brings me toward how to protect your investment portfolio against emotional reactions and poor decision making:
- Use a professional advisor. Yes, I’m biased here, but DIY investors will inevitably buy and sell at the wrong time. A professional investor will help you stay the course. I may be emotional, but GreenLife still can be professionally objective when it comes to your money.
- Diversify. If your investments are properly diversified to match your risk tolerance profile, you likely will not feel the need to jump ship when markets become volatile. Diversification will help dampen the inevitable drawdowns.
- Dollar cost average. This method eliminates subjectivity and emotion by sticking to a predetermined schedule regardless of market volatility. A long-term investment plan avoids poor short-term reactive decisions.
- Maintain an emergency fund. Too often tumultuous markets and a contracting economy accompany income and even job losses. The time to raise cash is not when the markets are bearish. Having a cash cushion helps prevent taking unnecessary losses.
Now back to the emotional rollercoaster. Meditation, yoga, and Chamomile tea, anyone?