The meteoric spread of the novel COVID-19 coronavirus has forced many governments across the globe to order non-essential businesses to shutter their doors. Economic activity has consequently slowed or, in some cases, stopped entirely. Bond, commodities, and stock markets have reflected investors’ deep uncertainties about when and how normalcy will return.
Anxiety is a natural response in the face of adversity. Panic caused by anxiety, on the other hand, can lead to investment decisions bearing long-term damage to an investor’s portfolio. Conversely, exercising mental toughness and strategic decision-making can minimize the risk of being swept away by current economic conditions.
If we have learned anything from previous economic downturns, it’s the steps and initiatives toward preserving or even building wealth during turbulent times. In this article, we’ll look at five pertinent strategies to fostering mental toughness and making sound decisions in today’s economic climate.
The difference between tactics and strategy is best illustrated by the military analogy that tactics win a battle while strategy wins a war.
Former chairman of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair blamed “short-termism” for the 2008 Housing Market Crash. The pursuit by financial institutions and day traders for immediate, large scale returns in housing markets was ultimately detrimental to both the short-sighted investors and the economy. In this respect, thinking short-term was more akin to gambling than investing.
Rather than looking for a winning lottery ticket, investors who think long-term protect their assets and always look for steady investments even if they tend to grow slowly. Examples of stable investments during a downturn include:
Anxiety is the body’s physical and mental preparation to fight or flee when faced with imminent danger. Danger, in turbulent times, usually arises from uncertainty about the future. It stands to reason that reducing uncertainty will lead to more strategic decision-making.
Financial uncertainty comes from the fear of loss. Some ways investors can overcome the fear of losing assets and income include:
Mental toughness comes when an investor maintains a long-term goal despite short-term volatility. A very real temptation exists to shift goals or quit and follow the crowd heading for the exits. However, investors deride panic selling because selling in a down market locks in losses.
By analogy, a team guarantees that it will not win a game if it falls behind in the first half and quits the game at halftime. The team can only mount a comeback if it returns to the field and plays the second half.
Changing goals and seeking safety by selling an investment in a sound and stable company while its stock price is down will invariably guarantee a loss. If the company is sound, maintain the goal of growing with that company and apply the principle of dollar-cost averaging (DCA) by strategically buying more shares in that company. When the market rebounds, profitability occurs at a lower price because profits on the stock purchased at the lower price offset losses on the stock purchased at a higher price.
The long-term annual return of stocks is 10% before inflation. However, since the current economic expansion has lasted over a decade, some investors have been lulled into a sense of security that stocks are the best or only investment.
An economic downturn is an opportunity to strategically shift money into other asset classes. Even though the long-term values are retained, the short-term prices of many of these other classes will also drop. This gives an investment room to grow over time. This will also build a portfolio of assets with exposure to varying forms of risk so that a drop in the price of one asset class will not wipe out the entire portfolio.
Within every economic reversal from expansion to recession lies an opportunity. For example, rather than panic selling, investors can buy coveted stocks at low prices. Investors who, for instance, have always dreamed of buying shares of Berkshire Hathaway might be able to do so during an economic downturn.
Anxiety is a natural reaction to turbulent times. Mental toughness and strategic decision-making occur when investors act according to the goals and long-term strategy in their financial plan rather than giving in to anxiety. By acting proactively to ensure that the financial plan still fits their needs and trusting in the resiliency of the world financial system, investors can avoid decisions that will cause short-term damage and thus prevent the investor from reaching the long-term goals in the financial plan.
Want to discuss your financial plan and how to make long-term strategic decisions to preserve and grow wealth during these turbulent times? Get in touch with us by filling our contact form or by sending an email to [email protected].
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