One of my favorite Mike Tyson quotes is “everyone has a game plan until they get punched in the mouth.”
After 10 years of almost uninterrupted gains in the stock market, the coronavirus and resulting market decline blasted investors with a fast and devastating haymaker. The question is, how is your game plan holding up?
Investors are made or destroyed in times of crisis, and how you behave matters. But I think many people are finding out their game plan may be more difficult to stick with than they had originally thought.
When the stock market rallies for almost an entire decade, investing seems really easy. It makes it easy to just invest on your own without the assurance of a financial advisor. It makes it easy to invest in a portfolio with more risk than you can actually handle.
Investing was easy until two months ago. At this point, many do-it-yourself investors and people who took on more risk than they could handle are probably feeling very punched in the face and wondering if they can stick to their original game plan.
Though these investors shouldn’t rush to make any changes to their investments, they may want to take an honest look at their long-term game plan for investing and see if it needs an adjustment.
Do-It-Yourself Investors: Do You Actually Need an Advisor?
One of my favorite coaches in mixed martial arts is Greg Jackson. He has trained multiple world champions and is no doubt a master of training athletes and creating winning game plans for them. But it is his demeanor in the heat of a fight and the way he calms his fighters between rounds that I think makes him a true master.
Mixed martial arts is an intense, personal sport. Fighters can easily get too emotional in the heat of a fight, which is a very bad thing when the consequences for mistakes are knockouts and cranked limbs. After a round where a fighter gets overwhelmed or emotional and needs to refocus on the game plan, the minute they are given to recover between rounds is absolutely make or break as far as the fight goes.
I love Greg Jackson because after a round of one of his fighters taking an absolute beating and getting all worked up, he will without fail walk into the cage to talk to them with an aura of calm that is so strong it can even be felt by the viewers at home. He always, in the most relaxed tone, says things like “alright my friend this is what we trained for; just another day at the office.” His calming presence brings the emotions of fighters back down to earth and allow them to refocus on what is ahead.
Lately financial advisors have had to channel their inner Greg Jacksons, reminding worried stock investors that “this is what we signed up for; just another day at the office” while their emotions run high.
This calm among emotional turmoil is where financial advisors create the most value for their clients. But after 10 years of an uninterrupted bull market, even I was beginning to ask myself, is it really that valuable?
It takes times of great turmoil to show that it is. I know for a fact we have prevented people from making “the big mistake” – abandoning their investments at the worst time. Even with this week’s pullback, investors who sold their investments a month ago have missed out on double digit returns in the stock portion of their portfolios – returns they will likely never have an opportunity to get back.
If you are a do-it-yourself investor that either made that mistake already or are thinking about it now, you may want to consider talking to a financial advisor. You will be tested with many periods like this throughout your investing career; anything you can do to make sure you avoid big mistakes during those periods will be extremely valuable.
If You Bit Off More Risk Than You Could Chew
When the market rallies and everyone wants to participate in the returns being created, they often forget that those returns come with some serious uncertainty. Even though investors “knew” a stock portfolio could decline 30%, it seemed like such a remote possibility that it was very easy to overlook in the pursuit of higher returns.
Actually visiting the negative numbers stock investors were warned about turned out to be as shocking to many of them as a punch in the face.
I don’t think anyone can really predict how they will respond to being tested like investors have been lately. It wouldn’t surprise me if many investors have found out they actually can’t emotionally stomach the declines they signed up for when they chose their particular mix of stocks vs. bonds.
Though you don’t want to fall prey to emotional investing and make arbitrary changes at the very worst time, it is important to recognize if you perhaps bit off more than you could chew as far as risk in your portfolio. If you are invested in a portfolio that you now realize you will not be able to stick with over the long-term, it is ok to make a permanent adjustment to change that.
I emphasized permanent because suggesting you can make changes to a portfolio because you are emotional right now is a very slippery slope. You don’t want to get caught making short-term switches to your allocation in response to short-term events because you will inevitably end up chasing performance (selling after the market drops, buying after it rises) which will provide you with a pretty miserable experience as an investor.
I would suggest waiting at least a year to make sure you aren’t just making this change on short-term emotions and will regret it later. Think of any change to your allocation as a change that will last for years or decades, not months or “until things get better.” Make sure to make that change only if your financial plans can still be funded with the new portfolio.
Final Thoughts: Stick to Your Game Plan or Make Calculated Adjustments
Sticking with an investment portfolio during times of turmoil is important, but it isn’t easy. Even though investors generally shouldn’t make short-term changes to their investments when they are highly emotional, it is important to recognize if their original investing game plan isn’t something they can stick with.
Do-it-yourself investors who found out they may need some extra help to handle the emotions that arise during market turmoil should seek out a financial advisor they can trust. Investors who found out they don’t have the risk tolerance to handle the portfolio they are invested in now should consider making a permanent adjustment to their mix of stocks and bonds, assuming they can still fund their goals with a lower-risk portfolio.
Neither of these investors should think of making a change as a failure. But if you are considering a change because you already made a mistake like selling your investments when the market was in the tank, welcome to being human. The important thing is that you learn from this experience, and use that to make yourself a more successful investor going forward.
Paul R. Ruedi, CFP® is a financial advisor at Ruedi Wealth Management.
Paul has been quoted in news publications including USA Today, Time Magazine, The New York Times, Dallas Morning News, Forbes, Inc.com, Business Insider, US News and World Report, GoBankingRates, The Street, NerdWallet, and The Penny Hoarder. He also writes articles that have been featured in CNBC, Investopedia, Yahoo Finance, Nasdaq, and MSN Money. He was named one of Investopedia's Top 100 Most Influential Financial Advisors in 2018.
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