By Carla Fried Rate.com
WWR Article Summary (tl;dr) Carla Fried takes a look at a few widely shared fears and some calming facts to help you slow down and make well-considered decisions during this time of crisis.
The stress of worrying about our individual and collective health during the COVID-19 crisis is the heaviest of burdens. At the same time, you may be consumed with fears about your financial security. Global stock markets have been in free fall, bond markets wobbly, job losses piling up as the economy grinds into recession. Social distancing is your best defense against the virus.
But how to address financial fears?
It is absolutely rational to be afraid about your household's financial security. The challenge is to push yourself, and anyone in your tribe who is stressed, to not act rashly. In times of stress, our emotions push us to make decisions that provide immediate relief. But we can end up paying a long-term price.
This has nothing to do with intelligence or education. It has everything to do with the curse of being human. There is an entire field of psychological research focused on ways our emotions can make a mess of our finances.
Two Nobel prizes for economics have been awarded for this work.
So, let's agree that you're not wrong to feel what you're feeling. The key is to see if you can slow down and make well-considered decisions. What follows are a few widely shared fears and some calming facts to help you.
-I want to sell all (or most) of my stocks. I can't stand the losses. Research explains why flight now is so much more appealing than fight. It's our nature to focus on the short term, and, let's face it, the short term right now is downright scary. This is known as myopic loss aversion. Related research has found that the pain we feel from losses is about twice as psychologically powerful as the pleasure we get from gains. We also love to extrapolate; whatever we're experiencing now we convince ourselves will continue, something called recency bias. Right now, it is screaming to us that the sky will never stop falling.
Remind yourself you're invested for the long term. As unpleasant as a bear market is, it's part of the investing cycle. This is the 13th time since the end of World War II that the S&P 500 stock index has lost at least 20%, the definition of a bear market. The average bear market loss is about 33%. Still, if you invested $100 in the index in 1945, and didn't panic through 13 bear markets, you would have about $88,000 today, an annualized return of more than 9%.
More recent data from the financial crisis: From early October 2007 through early March 2009, the index lost more than 50%. Investors who stayed focused on the longer term were rewarded. From that October 2007 high through March 23, 2020, one completed bear market and one currently roaring _ the index gained nearly 90%. During that same stretch, if your cash was parked at your bank or a money market mutual fund, you earned 10%.
-Why do we own stocks anyway? I knew we should have just kept everything in the bank, safe and sound. Another deep breath.
A behavioral habit we're all prone to is called the money illusion: We forget that inflation over time reduces the value of money.
What cost $100 in 1975 would require $500 to purchase today, given inflation over that stretch. Sure, inflation is low now, but your retirement security is riding on making sure your money over time earns an after-tax return that maintains your purchasing power. That's hard to do with bank savings and money market funds. Stocks, over time, have delivered the best inflation-beating gains.
Let's say you had $10,000 to invest in 1975. If you kept the money in cash, you would have about $15,000 today after adjusting for inflation. Invested in U.S. stocks, your $10,000 would be worth nearly $300,000 after adjusting for inflation.
-Stocks are down more than 20%. I can't deal with a 20% loss! Remind yourself: 100% of your portfolio isn't invested in stocks. Your diversified asset allocation likely includes bonds. If you're near retirement or in retirement you likely have at least half in high-quality bonds and a bunch in cash. This scary time is when diversification helps: Bonds and cash don't fall like stocks.
-I'm not giving up on stocks forever. Just for now. I'll get back in when the bear market is over. That would be great. But alas, as the saying goes, no one rings a bell to tell us when the bear market is over. If you sell today, you have to be right about when to get back in. If you think you can do that, you're likely suffering from dangerous overconfidence bias. You think you can time the market.
If you are not invested on just a few days when the market is going gangbusters, you are going to miss out big time.
According to J.P. Morgan Asset Management, a hypothetical $10,000 investment in the S&P 500 at the beginning of 2000 was worth nearly $32,500 at the end of 2019. If you had missed just the 10 best days for stocks during that entire 20-year stretch, the $10,000 would have been around $16,000.
That's why a popular investing maxim is "time in the market, not market timing." The best investment move you might make now is to tune out market news and resist any urge to check your portfolio values. Sticking with your long-term strategy to meet your long-term goals is in fact doing something. You aren't letting your emotions pull you into decisions that will put your plan at risk. ___ Distributed by Tribune Content Agency, LLC.