Maia Babbs, CFA in the Denver Business Journal: Investing in uncertain times: Actions to take (and not take)

Click here to view the original article on The Denver Business Journal

The COVID-19 coronavirus pandemic has been an emotional and exhausting time for everyone. We have felt anxious and fearful for our own health and the health of our loved ones. Stay-at-home orders, social distancing, school cancellations, and employment challenges have rapidly become the new normal.

We are all experiencing the loneliness of social isolation and high levels of stress and fatigue (especially fellow parents) while confined primarily to our homes. Added on to this, the seemingly never-ending news cycle reporting job losses, business closings, and wild swings in the stock market creates real fear about one’s individual financial situation, particularly as investment portfolios and retirement savings account balances fluctuate daily.

In the near future, normalcy will return. We will all appreciate the simple joys of seeing a concert, skiing, having a beer with a friend, and putting children on the school bus. In the meantime, despite the temptation to make emotionally charged decisions regarding investment portfolios given all that is happening, let’s talk about what you should you do next in your financial life. Let’s take a look at things to consider, and actions to take (and not take).

Take a deep breath and focus on the long term
A wonderful mentor of mine had a sign above his desk that said “Don’t just do something, sit there!” It was a humorous reminder that decisions are best made when one is calm, and the worst decisions are made when emotions are running high.

With the media cycle blaring news that the market has plummeted, our first instinct may be to sell all or most of our investments. Over the years, proven research in the behavioral finance field has shown this to be a reaction fueled by "loss aversion," because losses hurt about twice as much as gains feel good.

Now is the time to remember a fundamental tenet underpinning successful investing: investment returns and portfolio growth are achieved by staying invested over the long run, irrespective of short-term gains and losses. Market timing, including selling at the bottom of the market, can have disastrous consequences on portfolios and, ultimately, negatively impacts one’s financial goals.

Make sure you have enough cash for your emergency fund and other short-term needs
We forget the adage “cash is king” until times like these. As a general rule, funds needed in the immediate or near future, including tuition payments and other cash needs, should be held in highly liquid cash funds. It is also a good idea to keep approximately six months of savings in an emergency cash fund if possible. Take financial uncertainty out of the overall equation and be disciplined about your savings.

Stay invested and align your portfolio to match your level of risk tolerance
In situations like this, historical perspective is helpful. Stock price drops are not unusual, including drastic falls. The stock market has always recovered from its declines, and volatility is a normal feature of investing. Market sell-offs also create prime investing opportunities, allowing investors to buy high quality securities at attractive valuations. Not investing, or worse, selling a portfolio outright, prevents one from reaping the rewards from the market's recovery. That being said, you should establish a risk tolerance — how much of a loss you're prepared to handle when investments perform poorly — and make sure that your asset allocation of stocks and bonds fits that profile.

Engage your advisor
The market is cyclical and is subject to periodic crises. An advisor’s strategic financial planning counsel and investment management can provide guidance through the uncertain times that will invariably occur. A good financial advisor helps clients identify their short- and long-term financial goals, creates an investment portfolio based on an individual’s risk tolerance, provides perspective in uncertain times, and prepares months and years in advance for future cash needs and recurring distributions so that you do not need to sell stocks on a "risk-off" day.

Reach out to our team today if you want to discuss our investment management services.