How to Stay Sane in Times of Crisis
In the last few weeks, we’ve seen some of the largest losses and gains that the financial markets have experienced in modern-day history. During times like these, it’s easy to get drawn into the chaos and feel the need to take action. Unfortunately, hastily made decisions, especially in an investing context, can have very negative impacts on a portfolio’s performance. Luckily, we have a few tips and tricks to keep calm in moments of chaos. Know Your Risk Tolerance One of the best things you can do for yourself and your portfolio is to examine your ability to tolerate risk ahead of time and then invest accordingly. Thinking through what type of drops you can stomach when your head is clear and then investing similarly will help keep you from panicking and exiting the market at inopportune moments when selloffs do occur. Have a Plan Understanding your ability to tolerate risk often goes hand in hand with examining your present financial situation and setting financial goals for the future. While a risk questionnaire can help you understand how taking risks affects you mentally, having a financial plan gives you a better idea of how much risk you need to take to meet your goals as well as what levels of risk put your financial plan in jeopardy. Not only that but having a plan in place with a stated time horizon allows you to see moments of crisis relative to the big picture. For example, the current financial downturn may feel intense at the moment. Still, when you consider it in the context of saving for retirement – an event that might be 30+ years away – you remind yourself of the time your portfolio has to recover. Be Mindful of Your Biases In the last few decades, the field of Behavioral Finance has gained much traction as more and more research has unearthed the extent to which our emotions cause us to behave irrationally. Our feelings are often uniquely intertwined with our money, and we need to be mindful of the inherent biases we have when it comes to investing. One such bias is known as overconfidence, which is the belief that we’re better at something than we are. Overconfidence tends to show up when things are going well and can cause us to become more aggressive than we ought. One of the best ways to mitigate overconfidence is to invite other perspectives and, as mentioned previously, plan ahead. Another bias that tends to show up during large market swings is known as regret aversion bias, which is the fear of missing out. This bias can cause people to sell out towards the bottom or buy-in towards the top because they’re afraid they might miss out if they don’t jump in along with everybody else. Unfortunately, trading on a feeling such as fear can be detrimental to long-term performance.
Get Help If you find yourself overwhelmed at the prospect of handling market turmoil, it might be time to look for help. But don’t just hire the first person you meet. Take your time and do your research. Ask many questions about fees, how an advisor’s interests align with yours, what type of processes they have in place to make smart decisions during market tantrums, and then compare notes with what you know to be true. If it feels like someone is just telling you what they think you want to hear, then they might not be the best option. A good advisor is one that’s rooted in investing fundamentals, someone who won’t talk over your head but listens to your concerns, and someone that works with you to plan both for your future and market upheaval. And sometimes, having someone a little removed from your financial situation who can help you see the big picture can make a world of difference during times of strife.