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Reassess Your Risk

Published by Joe Perna, CFA, CFP® on Wed, Jul 29, 2020
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These are undoubtedly trying times for investors. Think all the way back to March: How did you feel as you watched stocks sell off? Were you queasy or did you buy more shares? Did you sell or did you do nothing? And how are you feeling now that the market has recovered most of its losses?

It’s important to know what’s driving your investing decisions: your emotions or your financial strategy?

To some of our clients, the market drop in March was an opportunity to invest. Google searches of “how to buy stocks” saw an enormous spike as people rushed to buy shares at discounted prices. This may not be a bad strategy. After all, buying low and selling high is how one makes money in the market.

However, as a financial advisor, I cringe when people make buy and sell decisions based on news headlines, emotional impulses, and attempts to predict the future. 

What Clients Are Asking

Right now, the most common question I am asked by both current and prospective clients is this: “The market is detached from the economy, and it’s going to go down, so why should I invest now or stay invested?”

What I hope you see is that this is a question about market timing. What they’re really asking is whether now is a good time to buy.

Over my 10-year career, I’ve learned that people are awful at timing the market and that they often don’t even realize they are doing it. For instance, some clients have recently asked me about the idea of selling and going to cash. When I suggest that doing so is a form of market timing, they vehemently disagree. However, that is exactly what it is.

If you’re basing an investing decision on news headlines, feelings, or reading the tea leaves, that, I’m afraid, is market timing. It is not a financial strategy.  

Now, I’m not saying that people shouldn’t be cautious. It’s natural to worry about the potential for downside -- such as stay-at-home orders being lifted too soon and creating a second wave of the coronavirus -- and how it might affect the economy.

Ultimately, you’ll have to ask yourself this: What can I accurately predict about the future that others can’t? Without a crystal ball, the answer is not much. Again, guessing what the future might hold does not a strategy make. 

Think of it this way: A good financial strategy should leave one feeling calm, in control, and aware of all the options. It’s the exact opposite of panic and impulsive decision making.

What I Wish They Would Ask Instead 

Now is a time to reflect first and take action second. I wish my clients were taking this time to reassess their risk tolerance and objectives for their various investment accounts.

So far, this year has been a fantastic example of how having an investment plan and sticking to it can prevent panic, inform better decisions, and allow for more restful nights even during times of turmoil.

So, ask yourself: “Are my financial strategy and investments aligned with my goals and risk tolerance?” 

At the risk of sounding like a broken record, now is a great time to reassess your risk tolerance and objectives for your investment accounts. You don’t have to imagine how you might react during uncertain times, because we’re living in it. 

Right now, you have access to real-time data. If the market roller-coaster ride in March was nauseating for you and you’re still anxious even though we’ve recovered most of the losses, you may need to dial back the risk in your portfolios.

I’ve spoken to a number of people recently who have considered going from 100% equities to 100% cash. However, don’t forget that there’s plenty of middle ground -- going from the most aggressive portfolio to the most conservative is probably too drastic.

On the other hand, if you’ve kept yourself in cash and missed the rally back, don’t fret. Before you jump back into the market, first ask yourself: What are my time horizon and objectives for the account? Your answer should then dictate what you do next.

I don’t recommend attempting to time the market, and while you may feel a stock market meltdown is imminent, do you really want to risk your financial returns and long-term objectives on a hunch?

My hope is that you’ll take a step back before you make any radical changes. Your future self will thank you.


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