By Steve Doster | Mission Valley Money
The recent 5 percent 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 in this area trying to understand why the average investor under-performs index mutual funds. The root cause of under-performance is investor behavior that is illogical and emotion-based.
A great example of this is the recent downturn. We see that investors tend to 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 emotions from investing. The result is poor investment performance.
Human brains seem to be programmed to make 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 that don’t know, October is National 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, a lot of decisions need to be made. A financial plan is the best tool to help you make 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 that helps 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.
The National Association of Personal Financial Advisors (NAPFA) is the country’s leading professional association of fee-only financial advisors — highly trained professionals who are committed to working in the best interests of their clients. Use the “Find an Advisor” tool at napfa.org to locate advisors near you.
Once you have a financial plan and an investment strategy, you are free of emotions and illogical decision-making when it comes to your portfolio. 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!
—Steve Doster, CFP is the financial planning manager at Rowling & Associates – a fee-only wealth management and CPA firm in Mission Valley helping individuals create a worry-free financial life. Rowling & Associates helps people with their taxes, investments, and retirement planning. Read more articles at rowling.com/blog.