We are in a period of great financial uncertainty, with high inflation, the threat of recession and continued market volatility. Understandably, many investors are “quite scared right now,” said Brad Klontz, a psychologist and board-certified financial planner.
And when we’re stressed, our frame of reference tends to get clipped, said Klontz, who is also a member of CNBC’s Financial Advisor Council. In other words, the awkward moment feels like the only thing that matters.
While this tendency is a survival mechanism that has helped us act in times of stress, it can lead us to “do the dead wrong thing when it comes to investing,” Klontz said.
Instead of trading your money impulsively, consider taking these two steps, Klontz said.
1. Remind yourself why you are investing
Most of us are long-term investors, Klontz said. “Does it make sense to you to look at a really narrow frame of reference?” he asked.
If you’re investing for retirement, you might not need that money for decades, so the answer is no. What happens to the S&P 500 over a few months, or even a few years, shouldn’t matter too much.
If you zoom out, the average annual return on stocks between 1900 and 2017 was about 8% after adjusting for inflation, according to Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore.
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Simply put, if you can’t get through the bad days in the market, you’ll lose the good ones too, experts say.
Over the past 20 or so years, the S&P 500 has produced an average annual return of around 6%. During that time frame, if you missed the top 20 days of the market because you were convinced you should sell and later reinvested, your return would shrink to just 0.1%, according to Charles Schwab’s analysis.
2. Ask yourself: what is the money for?
Of course, most people don’t just save and invest for long-term goals like retirement. If market volatility is causing you a lot of stress, you may need to make adjustments.
If you’re investing in the market for a shorter-term goal, like buying a car or a house, “there’s a good chance you’ll get hurt,” Klontz said. “By the time you need that money, it may be down 10%, 20% or more.”
Ivan Pantic | E+ | Getty Images
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