Stock market investing can be emotionally challenging, especially during a major world crisis. That’s precisely why successful investing is not only a result of which good decisions you make, but also the poor decisions you avoid.
In this article, we’ll cover 5 investing mistakes to avoid during a crisis.
1. Believing you need to “do something”
When the stock market declines, and investors subsequently see their account values decline, it can feel nauseating. And, it feels almost irresponsible to simply sit there and watch, doing nothing.
But, there is a chance that doing nothing is precisely what investors should be doing during this time, especially if your portfolio was properly allocated prior to the crisis.
What does properly allocated mean? I believe it means invested in a portfolio of low-cost, diversified funds, and your allocation has been created with your unique financial situation in mind. If this describes your investments, the presence of a crisis is not likely to suggest major changes.
Now, if the “something” you plan to do during a market downturn includes buying stocks or correcting a previously improperly allocated portfolio, those could be prudent actions to take (but speak with an investment adviser before making any investment decisions).
2. Consuming too much news
First and foremost, news outlets have one goal in mind and that is to drive ratings. Once you understand this, you’ll understand that although some reporting may come across as advice, the media are not your advisors. They are not fiduciaries and are not required to act in your best interests. They don’t care if you retire on time, lose money, or run out of money.
Because of this, the tendency is for media outlets to exaggerate headlines, often making things seem worse than they are. Do they care if you make poor investment decisions and lose money as a result of their exaggerations? Of course not.
They won’t tell you what you need to hear, only what they think will stoke the fear fire, and this is what can lead to many investors feeling like they need to do something or sell something.
So, what should you do during the next crisis? Turn off the TV. Put down your phone or at least stop reading the headlines on your stock app. Better yet, read more articles like this that will reinforce the behaviors that will lead to better outcomes.
3. Checking your accounts just for the balance
When you are monitoring your accounts in a crisis, or at any time, the first thing you’ll likely take note of is the balance. I get it. It makes sense. But, you can see why this might be counter-productive during a down market. So, instead of focusing just on the balance, there are several other things you should monitor, and some of them are good to do at any time.
The main one is allocation. Are you diversified? Do you have a nice mix between large cap, small cap, domestic, and international securities? Monitoring your asset allocation would help determine if a
rebalance is needed (meaning you may want to sell your top performers and buy your lower performers).
4. Looking at your accounts too often
Problems arise when investors are logging in everyday (or more) to view their balances. Logging in to view your balance is just another activity that can perpetuate the “do something” narrative that investors should be trying to avoid. It will make you feel every bump in the road and will make the emotional roller coaster ride of investing in the market even more emotional.
So, monitor your accounts, but consider doing it less often.
5. Improperly evaluating performance
Lastly, it can be easy to look at your investments during a down market at think they’re bad investments because perhaps they show negative YTD returns, 1-year returns, 3-year returns, or even negative 5-year returns. But, measuring any security or group of securities at a bottoming point can be quite misleading. Take the S&P 500, for example. The average annualized return of the S&P 500 index from its inception in 1926 through December 31, 2021, is 10.67%. But, there have been many 5-year periods where the S&P 500 returns were negative, including 2000-2004 and 2007-2011. Does this mean the S&P 500 is a bad investment?
Absolutely not. This data simply suggests that stocks are better to be evaluated over long periods of time as they can be fairly unpredictable in the short run. Savings accounts and money markets, on the other hand, do not require the same amount of time for predictable results. That is why they are reliable short-term investments.
Behavior is such a huge dictator of success and it’s often the hard times that separate successful investors from those that underperform. To help promote better behaviors in your own financial life, do yourself these few favors during the next market downturn.
Most of all, make sure you are invested properly and according to your own customized financial plan. If you do that, and focus on what is in your control, you’ll have a better chance of avoiding these crucial mistakes during the next market crisis. And, as always, if you’d like a complimentary retirement analysis, you can contact us at 618-288-9505 and we’ll be happy to help.
Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results. No portion of the article shall be construed as a solicitation to buy or sell any specific security, investment product, or particular investment strategy. In addition, this article shall not constitute personalized investment, tax or legal advice. Information contained in this article may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources.