December has been a rough month for investors, the kind of month that makes even the most battle scarred veterans’ hold their breath and hope for a sign that the worst is over. Sorry to say that there is never such a sign, which is why the saying “they don’t ring a bell at the top or at the bottom!” came into being.
Right about this time, you may be feeling a certain amount of queasiness, leading to low levels of anxiety and maybe even full-blown panic. Oh sure, you know that investing is risky…after all, that horrendous bear market of 2008-09 is not such a distant memory. But you may have forgotten just how awful the gut-wrenching losses can feel, especially as you confront those monthly and quarterly statements.
Here’s the thing: those emotions are totally normal, but you need to guard against doing something that can knock you off course. To help, here is a handy dandy “Investor Panic Prevention Plan.”
Step 1: Remind yourself why you are investing. Most of us are saving for a long-term goal, like retirement or college, which is likely years or even decades in the future. Even if you were retiring within the next couple of years, your account needs to last another 20-30 years. That thought should help soothe some of the raw nerves, And here’s a bonus: as money comes out of your paycheck and goes into your 401 (k), 403 (b) or 529 plan, you’re purchasing shares at a hefty discount to the levels seen just six months ago.
Step 2: Determine whether you need cash. Do you need to make a house down payment, purchase a car or pay a tuition bill within the next 12 months? If so, that money should never have been be at risk at all, so admit that you blew it and get whatever you need out of the stock or even the bond market and keep it in a safe savings, checking or money market account.
Step 3: Check your risk tolerance. Sure, you felt bold when stock market indexes were making new highs. Maybe you even purchased a little more of your company stock, because “it’s really worth (fill in the blank).” Now that those decisions are blowing up in your face, how do you feel? Maybe you really can’t stomach as much risk as you thought you could. If that’s the case, you may need to readjust your allocation. Here’s your warning: If you do make changes, do NOT jump back into those riskier holdings after markets stabilize. You need to make a pinky swear with yourself that you will stick to your revised plan, FOR REAL!
Step 4: Find free money. If you want to help yourself feel better about market losses, figure out how much you are paying in investment fees and determine if you can scoop up some free money. Can you replace an actively managed fund with a no-commission index mutual fund? How much are you paying a so-called advisor, who isn’t doing much to improve your bottom line? Could you replace him or her with an automatic investment platform at a fraction of the cost? Find that free money!
Step 5: Ask for Help. There are plenty of people who can manage their own financial lives, but others can really be their own worst enemies and make classic market timing mistakes, which leads them to buy high and sell low. If you are hiring a pro, make sure that you know what services you are paying for; how your advisor is compensated; and be sure that she/he adheres to the fiduciary standard, meaning she/he is required to act in your best interest. To find a fiduciary advisor, go to NAPFA.org, LetsMakeAPlan.org, or AICPA.org.