Financial conditions call for thoughtful reaction
Investors shouldn’t confuse courage, recklessness
Sarah CarlsonMarch 10th, 2022
This year has opened with a bang, with so much challenging news between inflation and the economic drama, a worldwide pandemic, and now, a war in Ukraine.
None of us can escape the updates on negative news. Investors are currently on a wild ride watching their accounts fluctuate daily, and hope of a secure financial future does not seem as inevitable.
Everyone feels discomfort with change, and many of us are looking for the strength to endure and deal with it.
We all have a loss aversion. In a turbulent financial market, you can develop an attitude of being financially fearless or being financially courageous to help navigate it. So what is the difference between being financially fearless versus financially courageous?
Being financially fearless is going with the crowd, taking actions based on emotion. People who throw caution away often don’t understand the risks they are taking. It could be fueled by greed or excitement in gambling, or this could mean going all to cash because you think you know better and can then time the market.
Being financially courageous is learning to be comfortable being uncomfortable. It takes courage to look to other points of view and different perspectives on the situation. It isn’t easy, but the key is to take the emotions out of the decision at hand and instead come up with a thoughtful response.
When it comes to investing, we all have an aversion to losing, and emotionally it hurts more to lose money than it emotionally feels good to make money. So how can you be more financially courageous and not get harmed from being reckless?
First of all, you need to assess your time horizon. When will you need your money for your financial goal? If your fund is for retirement and you have 20 years to retire, you can have a lot of volatility in your portfolio, for you won’t be pulling those funds out for a while, and historically, we know time can help reduce risk. By contrast, if you are retiring in two years, a market pullback could put a permanent dent in your retirement plans. Two years is not enough time to recover from a bad market.
Second, you need an overall strategy and one that you can revisit in a difficult time to hold yourself accountable to your goals. It is worth getting professional help in developing a plan and with someone you can consult when you are worried. A skilled professional can help save you from yourself in a challenging market.
Third, when you work with a professional, be clear on what your adviser can do, how much experience they have had, and what resources they have when you need help. It is worth making sure your adviser has a professional record that is acceptable to you. You can check out your financial adviser at https://brokercheck.finra.org.
You must have a fundamental understanding of what investments you hold. Your adviser should explain in terms you understand what you own and how it fits into your personalized plan. Your adviser should also understand the markets and history similar to the current drama. You also need to know if there are specific terms and conditions to getting your money out.
It is normal to have a certain amount of fear when things get tough, and fear is valuable information to help you process your surroundings. Market volatility is usually economic unrest. The more you can respond with a thoughtful reaction versus reacting with an action, the more you will come out ahead in getting to your financial goals and keeping your emotions in check. Be sure to focus on the things you can control versus those you don’t. A plan will help.
Sarah Carlson is a certified financial planner and the owner and founder of Fulcrum Financial Group, of Spokane. She can be reached at 509.747.2075.