New Haven Register (Sunday) (New Haven, CT)
Don’t mix investing and emotion
The first half of 2020 has seen the U.S. stock market hit a record high and then suffer one of the fastest and steepest falls in history when the coronavirus pandemic hit. The crisis provides a good opportunity to talk about the dangers of making financial decisions during stressful times.
It may be difficult to remember now, but the Dow Jones Industrial Average soared to 29,551 on Feb. 12, after first breaking the 29,000 barrier Jan. 15. No one knew it at the time, but it was the peak of a historic run-up: Exactly three years earlier the Dow had closed at 15,974 (on Feb. 12, 2016), meaning the stock index nearly doubled in that short time period.
But then the coronavirus struck, and the Dow dropped to 18,592 on March 23, a precipitous fall that left many investors stunned. Would the index continue its freefall? If stock values began recovering, when would that be?
By April 17, the Dow finished above 24,000 and was holding steady around that level at the time of this writing. Many investors continue to worry, however, about the effects of a potential second wave of coronavirus cases this fall.
Market fluctuations are a normal part of investing, but this time Americans experienced dramatic ups and downs in a very compressed time period. Such volatility can cause undue anxiety, but it’s usually a mistake to sell after a downturn or buy after an
upturn.
Successful investors remain disciplined and stay focused on their longterm financial plan, rather than making dramatic changes to their portfolio in reaction to good or bad market news. They know that chasing the market can lead to the opposite of the time-honored recipe to “buy low and sell high.”
Keep in mind the following investment principles
to avoid emotional decisions and to take a logicalapproach to saving for retirement:
Trading on fear.
When the headlines reflect scary downturns, too many people sell off stocks due to fear of further losses. The problem is, when you sell stocks after they’ve lost value, you are turning paper losses into real financial losses.
Remind yourself that markets ebb and flow.
Financial assets fluctuate in value, especially stocks, which are subject to national
and global economic conditions, geopolitical events and industry trends. If you feel shaky, remind yourself that “up” years have typically outpaced “down” years: If you pull out of the market during a down year you can miss when the markets ultimately reverse course.
Follow a plan.
Have a financial plan that includes diversification and tax aware rebalancing. Diversification means investing in a range of asset classes including stocks,
bonds, cash and alternative investments such as real estate. You must then periodically rebalance your portfolio to maintain diversification, since changing values among your various assets will increase the percentage of some classes within your portfolio and decrease the percentage of others. Diversification doesn’t mean assets won’t fall in value. If done well, you should have assets in your mix that have held steady during market declines that you can turn to for liquidity
while leaving assets that have fallen proper time to recover. A financial planner can help you create a plan based on your individual goals.
Above all, stay calm, follow your plan and avoid reacting to events. Let your money continue to work for you over the long term.
Eric Tashlein is a Certified Financial Planner professional and founding Principal of Connecticut Capital Management Group, LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be
reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Investment Advisor Representative, Connecticut Capital Management Group, LLC, a Registered Investment Advisor. Connecticut Capital Management Group, LLC and Connecticut Benefits Group, LLC are not affiliated.