With high inflation, the threat of a recession and continued market volatility, we are going through a period of high financial uncertainty. Understandably, many investors “are pretty scared right now,” said Brad Klontzpsychologist and certified financial planner.
And when we’re stressed, our frame of reference tends to get short, said Klontz, who is also a CNBC fellow. Financial Advisory Board. In other words: the uncomfortable moment seems like the only thing that matters.
While this tendency is a survival mechanism that has helped us act in stressful situations, Klontz said, it can cause us to do “the absolutely wrong thing about investing.”
Instead of acting impulsively with your money, follow these two steps, Klontz said.
1. Remember why you are investing
Most of us are long-term investors, Klontz said. “Does looking at a very narrow frame of reference make sense to you?” He asked.
If you’re investing for your retirement, you may not need that money for decades, so the answer is no. What happens with the S&P 500 over a few months or even a few years shouldn’t matter too much.
Zooming out, the average annual return on stocks was around 8% between 1900 and 2017, after adjusting for inflation, according to Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore.
Simply put, if you can’t handle bad market days, you’ll also have to lose the good onesexperts say.
Over the past 20 years or so, the S&P 500 has produced an average annual return of around 6%. If you missed the best 20 days of the market during this period because you became convinced that you had to sell and then later reinvested, your return would shrink to just 0.1%, according to an analysis by Charles Schwab.
2. Ask yourself: what is the money for?
Of course, most people don’t save and invest just 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 short-term goal like buying a car or a house, “there’s a good chance you’ll get hurt,” Klontz said. “When you need that money, it can be down 10%, 20% or more.”
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