Summer is here. In my house, that means at least one trip to the Sesame Place theme park. When my children were much younger, we would spend the day at the park playing in Big Bird’s Court, swimming in Twiddlebug Land, or licking our soft ice cream while waiting for the Rock Around the Block Parade. As they grew older, the main attraction was always Sky Splash or the Slippery Slopes. The thrill of the wild rides and the plunge into a cold pool always ended with, “Can we do that again?”
Recently, you wouldn’t have to go to an amusement park to experience the thrill of a roller coaster. The stock market has been giving us that sensation even as we sit at home on the couch — and no one is asking for more. Historically, the stock market has always had its ups and downs. Remember the Great Recession of 2008 and 2009? You as an investor cannot control the markets, but you can control your reactions to the market gyrations.
Here are three things to consider.
1. Investor Behavior
Volatility in the markets can cause people to lose sight of their long-term financial plan, goals, and objectives. Instead of making a rational analysis based on asset allocation and long-term goals, they may start making rash decisions based on fear. This is due, in part, to the behavioral finance concept of “anchoring.” Investors tend put more focus on recent trends than on long-term averages and probabilities. Beware of anchoring! Instead of selling a stock out of panic, pay attention to its overall performance outlook. The same concept applies when considering stock that has recently increased in value: Don’t purchase a hot stock without first considering its long-term potential. Do your research or get advice from your financial advisor.
Part of mitigating the risk of investing comes with diversifying your portfolio. While individual stocks experience frequent ups and downs, diverse portfolios with multiple investments may perform more steadily. Keep in mind your investment goals when building your portfolio, and strategize with long-term outcomes in mind. Disclaimer: While using diversification as part of your investment strategy doesn’t assure or guarantee better performance and can’t protect against loss in declining markets, it is a well-recognized risk management strategy.
3. Reviewing Your Spending Plan
Take note of your fixed and discretionary spending, and be aware of where your money is going. In good markets and bad, always spend less than you make, and save and invest the rest. Remember: Market dips may give us the opportunity to buy low with regular dollar cost averaging through a regular savings plan and retirement account deposits. If you need to revisit your plan due to fundamental changes in your financial needs and goals, work with an objective third party who is used to taking the wild rides of the markets in stride.
If you visit Sesame Place this summer, you won’t find me plunging down six stories on Sky Splash. I’ll be floating effortlessly in a big blue inner tube … on Big Bird’s Lazy River.
Looking for financial and investment advice from a trusted advisor? Loretta Hutchinson CFP®, CDFA™, NCC is a Certified Financial Planner™ and President of InSync Financial Group and Financial Divorce Plan, LLC in Yardley, PA and Naples, FL. She can be reached at LHutchinson@InSyncFG.com or 215-302-3437
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Loretta Hutchinson is a member of the DailyWorth Connect Program. Read more about the program here.