Market activity can be hard to predict.
The recent 5% correction in the U.S. stock market is a reminder that the market doesn’t always go up. After nine years of a bull market, it can be easy to forget that investing in stocks comes with risk. In times like these, it is crucial to have a solid investment strategy.
Investors are only human, and emotions can sometimes get the best of them.
Experts have done a lot of research, trying to understand why the average investor underperforms on index mutual funds. The root cause of underperformance is investor behavior that is illogical and emotion-based.
A great example is this recent downturn. We see that investors pull more money out during downturns selling at low points. Eventually, though, the stock market goes back up. That’s when investors decide it’s safe and put more money in. Logically, investors know this isn’t the correct way to invest – selling low and buying high. The problem is people can’t detach their worry, or sometimes even panic, from investing. The result is poor investment performance.
Human brains seem to be programmed for making poor investment decisions. Things like survival instincts, fear of missing out, and herd mentality can get the best of us during market cycles. It is almost impossible for an individual investor to manage these emotions and behaviors without professional help. A third-party buffer is needed to protect them from executing these illogical actions that could negatively impact their investment performance.
For those who don’t know, October is financial planning month.
This is a great time to get professional financial help in your life. A financial plan will allow you to review your current financial situation and set goals for the upcoming year. It’s also open enrollment for employer benefits, Covered California health insurance, and Medicare coverage. In short, lots of decisions need to be made. A financial plan is the best tool to help you make the correct choices.
Another crucial piece of your financial plan is the creation of an investment strategy based on your risk tolerance, age, and goals. The word “strategy” is defined as a high-level plan of action to achieve goals during times of uncertainty. This is exactly what you need before the next market downturn: a disciplined approach to making investment decisions well before markets get volatile and bounce around.
A financial plan will offer you freedom from worrying about your finances.
Once you have a financial plan and investment strategy, you are free of emotions and illogical decision-making when it comes to your finances. You are on the path of achieving your financial goals. You will also develop a sense of control over your finances that allows you to spend less time stressing about money. Have a great October and get that financial plan in place before 2019!
