With high inflation, the threat of a recession and ongoing market volatility, we’re in a period of high financial uncertainty. Understandably, many investors “are pretty afraid right now,” said Brad Klontz, a psychologist and certified financial planner.
And when we’re stressed, our frame of reference tends to become short, said Klontz, who is also a member of CNBC’s Financial Advisor Council. In other words: The uncomfortable moment feels like the only thing that matters.
While that tendency is a survival mechanism that’s helped us act in stressful situations, Klontz said, it can make us do the “absolutely wrong thing when it comes to investing.”
Instead of acting impulsively with your money, take these two steps, Klontz said.
1. Remind yourself why you’re investing
Most of us are long-term investors, Klontz said. “Does looking at a really narrow frame of reference make sense for you?” he asked.
If you’re investing for retirement, you may not need that money for decades, and so the answer is no. What’s happening with the S&P 500 over a few months, or even a few years, shouldn’t matter too much.
Zooming out, the average annual return on stocks was around 8% between 1900 and 2017, after adjusting for inflation, according to Steve Hanke, a professor of applied economics at Johns Hopkins University in Baltimore.
Simply put, if you can’t withstand the bad days in the market, you’ll also lose out on the good ones, experts say.
Over the last roughly 20 years, the S&P 500 produced an average annual return of around 6%. If you missed the best 20 days in the market over that time span because you became convinced you should sell, and then reinvested later, your return would shrivel to just 0.1%, according to an analysis by Charles Schwab.
2. Ask yourself: What is the money for?
Of course, most people aren’t saving and investing only for long-term goals like retirement. If market volatility is causing you a lot of stress, you may need to make adjustments.
If you’re investing in the market for a shorter-term goal like buying a car or house, “there’s a good chance you’re going to get hurt,” Klontz said. “When you need that money, it might be down 10%, 20% or more.”
Instead, you may want to park your savings for upcoming milestones in a high-yield savings account or a certificate of deposit, experts say.
Meanwhile, if retiring is on the horizon for you, it may be time to tilt your portfolio more toward safer assets.