There is a lot of unsettling news right now, and so much of it can hurt us financially. Higher gas prices and lower stock prices are a challenge to even the calmest among us.
And what makes the stress even more troubling is that academic research has documented that we’re all emotionally wired to feel the pain of losses in a way that is about twice the intensity of the pleasure we feel when things go well.
So when things go wrong financially, fear can take over, and that triggers another human habit: we want to do something to make ourselves feel better. To ease the discomfort. To stop the losses.
There’s nothing wrong with all those feelings. It is quite literally just part of how our brains work. But what I want you to focus on is how you respond when you start to feel uncomfortable.
Rarely does making a financial decision in the midst of extreme conditions pay off. Selling stocks because they are down will bring temporary relief if the markets continue to pull back for a bit. But if you’re a long-term investor—meaning you have 5 to 10+ years before you need the money—the bigger risk is that you won’t have money invested when stocks recover. And if you have a long investment horizon, don’t lose sight of the fact that lower prices offer a silver lining of being able to buy more shares that now cost less. Might they cost even less in a week or six months? Maybe. But you are investing for the long term. Being able to buy something that, over time, will gain value is not something to be fearful of.
This is where having a thoughtful, formal plan for your finances is so important. When you have taken the time to lay out your long-term goals and have organized your savings, spending, and investments, to help you move toward that goal, you will be able to manage your fear when things get rocky.
I am not suggesting you won’t be concerned when the market drops 5% or 10%, or more. But you will be able to check in with yourself and say, “Right, this happens from time to time. I planned for this, so I don’t need to make a big move right now.”
What do I mean by “planned for this?” Well, if you are near or in retirement, you know I want you to have at least 2 years of living expenses in cash. This is in addition to your emergency savings. Having a big cash reserve gives you the flexibility to cover your living expenses without having to worry about the fact that your stock investments are down. Even if you need to take a required minimum distribution (RMD) from a traditional 401(k) or IRA, you can make that from cash or bonds in the account, and just leave the stock holdings alone until they recover.
And if you’re 5 to 10+ years from retirement, you can calm your nerves a bit by reminding yourself that you are investing for the long term. And you know that over time, stocks have provided the best inflation-beating gains. Of course, you always want to make sure that you have the right-sized amount (for you) in stock. Maybe it’s 70%, maybe it’s 60% or less. That’s a personal choice.
In my book, The Ultimate Retirement Guide for 50+, I have detailed advice for how to think about investing and asset allocation. And if you’re looking for broader help in figuring out how to juggle your financial priorities, my free Action Plan is a great place to start.
Plan today, so you don’t overreact when fear hits.
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