2022 has got off to a rough start for investors. Already reeling from the prospect of higher interest rates, ongoing supply chain issues from the pandemic, inflation and increased geopolitical uncertainty, our emotions are running hot and our sense of security has been rattled, not to mention the fact that financial markets have been volatile.
It’s understandable for investors to panic when markets suffer a sharp decline. After all, that’s our hard-earned savings and investments we see disappearing. It’s the financial security we’re counting on to make important purchases, live our lives comfortably and care for our loved ones.
Unfortunately, though, that sense of panic that comes so naturally is not our friend. In fact, it can cause us to behave in a way that is in direct conflict with our best interests. You know the old saying “buy low, sell high.” Well, panic can easily make us do just the opposite.
So, what’s an investor to do instead? As someone who has benefited greatly from the practice of daily meditation and relaxation, I’d like to share a simple but effective four-step technique that can translate to the world of investing. Known by the acronym S.T.O.P., it can help us remain clear-headed and focused in the face of challenges, whether those challenges are personal, professional, or yes financial.
Stop: This first step probably sounds easy, but it may be the hardest. Give yourself a moment not just to slow down, but to come to a full stop. No news on tv or radio, no social media, no checking your portfolio or pension as various studies have shown that investors who constantly tinker with their portfolios do more harm than good. So, instead of logging into your accounts, take a walk, sit quietly or listen to music, do something that will give you a break.
Take a deep breath and stop. When you’re stressed, you’re more likely to say or do something you’ll later regret (we’ve all been there). So do your portfolio a favor by relaxing and clearing your mind before you make a rash decision.
Observe (but don’t act): Once you’re relaxed, you’re in a great place to open up your mind and gain perspective. First, remind yourself of some basic facts, as uncomfortable as they may be, market declines are inevitable, but the pain is temporary and markets tend to settle, recover and reward investors who can tolerate this temporary discomfort. With this perspective, take a few minutes to reflect on your goals, the time horizon of each of these goals and your willingness to take risk. What are you saving for? If its retirement that’s decades away, remind yourself that you have many years to ride out the current downturn. But if you’re saving for something in the next few years, perhaps you’ve taken on too much risk and you should consider rebalancing. There are no universally right or wrong answers but the important point is to take the time you need to calmly evaluate your situation.
Proceed: Once you’ve gained a deeper understanding of current conditions and have reasonable projections for the future, you can consider if a change is needed. When markets are in decline, often the hardest and smartest approach is to do ‘nothing’. But once you’ve taken the time to S.T.O.P., you will be in a much better position to act with clarity and purpose and with this knowledge front and center, accept that you are less likely to succeed by trying to time the markets. Instead, use your energy to focus on the things you can control: your goals, your asset allocation, diversification, and savings rate.
Once you have a well-constructed financial plan with a balanced portfolio in place, investing is less an epic battle between you and the markets, and more a tug-of-war between your emotions and your actions. Warren Buffet puts it this way: “All that’s required is the passage of time, an inner calm, ample diversification, patience, and a minimisation of transactions and fees.”
Yes, that’s a tall order. But whether it’s S.T.O.P. or another technique that works better for you, when the markets decline, do your best to focus on your goals and stay the course. Try to view periodic losses and uncertainty as nothing more than distractions as investing rewards those who have a disciplined process and requires patience during times of volatility and uncertainty.
Source: The Schwab Centre for Financial Research which is a division of Charles Schwab & Co., Inc.
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