Investor panic prevention plan
Despite your fervent wish to avoid down markets at all costs, I have bad news: Being a long-term investor means that you need to do just that.
It’s been a tumultuous ride in 2022 — and most of the action has been to the downside. The most recent selling started after the Federal Reserve’s May FOMC meeting, where, as expected, the central bank raised short-term interest rates by a half of a percentage point and announced plans to start winding down the bonds it bought over the past two years.
The Fed’s actions are intended to remove the boost that it gave to the economy amid COVID and to fight inflation. Investors are not so sure that central bankers are up to the task.
The fear is that they will either not be able to get prices down quickly enough to steady the economy or that they go too fast and trigger a recession. In either case, Fed Chair Jerome Powell’s much hopedfor “soft-ish” landing seems like a tough maneuver. It’s like the Fed is driving a speeding car and tapping on the brakes to slow it down. If they don’t get it right, the car (the U.S. economy) could veer off the road and land in a recession ditch.
I have an idea what you might be thinking: “Thanks for the info, Jill, but what should I do to protect my precious investments?”
Glad you asked, because I went back to a column from the February-March 2020 sell-off to see if my advice holds up, two years later. The plan will not shield you against market downturns, but it should protect you against yourself and, more specifically, protect you against your desire to do something when you see lots of down arrows.
Remind yourself why you are investing.
Most of us are saving for a long-term goal, like retirement or college, that is likely years or decades in the future. Even if you are retiring within the next couple of years, your account needs to last another 20 to 30 years. For those who are still investing, you’re purchasing shares at a hefty discount to the levels seen at the beginning of the year.
Determine whether you need cash. Do you need to make a house down payment, purchase a car or pay a tuition bill within the next 12 months? If so, that money should never have been at risk at all. So admit that you blew it, and get whatever you need out of the stock or even the bond market and keep it in a safe savings, checking or money market.
Check your risk tolerance. Sure, you felt bold when stock market indexes were making new highs. Now that those decisions are blowing up in your face, how do you feel?
Maybe you really can’t stomach as much risk as you thought you could. If that’s the case, you may need to readjust your allocation. Here’s your warning: If you do make changes, do NOT jump back into those riskier holdings after markets stabilize. You need to make a pinky swear with yourself that you will stick to your revised plan.
Find free money. If you want to help yourself feel better about market losses, figure out how much you are paying in investment fees and determine if you can scoop up some free money.
Can you replace an actively managed fund with a no-commission index mutual fund? How much are you paying a so-called advisor, who isn’t doing much to improve your bottom line? Could you replace him or her with an automatic investment platform at a fraction of the cost? Find that free money!