As of March 17, 2020, 179,111 cases of COVID-19 were reported, with the death toll reaching 7,426.1 With the number of infected patients rising every day, it’s nearly impossible to avoid feeling stressed or anxious about the world’s most recent pandemic. Aside from the concerns for our health, the financial toll of the Coronavirus pandemic is evident across the globe. After 11 years as a bull market, the stock market entered a bear market on March 11, 2020, with the market fluctuating in an unstable state since. But as an investor, it’s important to remember what your biggest focus should be right now: your personal economy.
This is an emotional time for everyone, there’s no doubt about it. But one of the greatest dangers to your wealth may not be the market’s dips and dives, it may be the temptation to make emotionally charged decisions regarding your wealth. Below we’re discussing the impact behavioral finance can have on your investments and what you can do about it.
What Is Behavioral Finance?
In a perfect world, the stock market would be predictable. Philosophers and economists have studied the markets for decades, even developing theories and models to explain and predict trends and responses in the market. The problem? Money, and the way we interact with it, isn’t black and white. As humans, we typically cannot make objective decisions regarding our own money. Whether we realize it or not, we are influenced by subconscious biases and, especially in the face of a pandemic, what we read and hear on the news.
This behavioral bias can help account for unexplainable phenomenons in the market, such as the “January effect,” an increase in stock prices that tends to occur at the beginning of the year.
How Behavioral Finance Impacts Your Portfolio
Even the most disciplined investor could be having a tough time staying strong in the current economic climate. With new information about market changes and the spread of COVID-19 flooding social feeds and taking up entire news cycles, no one is immune to hearing about it.
When you hear on the news that the market has plummeted, your first instinct may be to get out immediately. This is a gut reaction, fueled by the short-term fear of a market crash. However, now’s the time to remember the truth about your investments: they’re meant to be a part of your long-term financial goals, not short-term gains.
When in Doubt, Call Your Advisor
To help avoid making impulsive, emotionally charged decisions about your money, talk to your trusted financial partner. Find reassurance in their calm demeanor and big-picture mentality. The market is meant to cycle, and using strategic, logistical planning is one way you can stay focused through these uncertain times.
It’s important to remember that your advisor is meant to act as the buffer between your emotions and your investments. With shifts in the market, now may be a good time to reallocate certain assets. This decision, however, should be based on facts, logic and experience, something your advisor can help you with.
2020 has certainly been off to a rocky start. But as you work to keep your loved ones safe from the spread of COVID-19, remember to keep calm, stay rational and remain informed about your investments as well. We are here to help you stick to your long-term goals, so you should always feel free to reach out with your concerns and questions.
Both current clients and people interested in a free consultation with Elizabeth O'Donnell, CFP©, MBA in Denver, can follow the scheduler below to set up an appointment. Thank you and stay safe!
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.