An economic downturn could be looming in early 2023, inflation is running high and headlines are filled with doom and gloom. That’s exactly why it’s important stay calm and remember the power of long-term financial planning. Your financial wellness depends on it.
Here’s why: With markets under pressure and interest rates surging, it’s natural to feel the need to do something—anything—to avoid incurring portfolio losses or to mitigate the impact of higher expenses as the cost of goods, services and borrowing increases. It’s a natural reaction, but when it comes to financial planning, acting in response to emotions and fear will usually only derail what may otherwise be a sound wealth-management strategy.
Regardless of what’s happening around the world and its effect on the markets, it’s important to stick to a long-term view and avoid the temptation to make emotional or headline-driven decisions.
Perspective from history
To help you take economic volatility in stride, remember that we’ve been here before. Recessions are cyclical and always end. They can even have some positive side-effects, laying the groundwork for new businesses to emerge as old ones fall prey to competitors or macro-economic factors. And as an investor, you may be surprised to learn that most market volatility won’t matter much in the long run.
A recent Bank of America study showed the importance of staying invested during periods of volatility and not trying to time the markets. According to the study, if you stayed invested in the S&P 500 between 1930 and 2020, your investments would have yielded a cumulative return of 17,715 percent. If you missed the 10 best days each decade, your total return would stand at just 28 per cent.
History has shown us that the biggest drops are often followed by some of the market’s best rebounds, so it’s important to not let short-term fear drive long-term decisions. In other words, stay committed and play the long game. Even Warren Buffett, widely regarded as one of the most successful investors in history, has long relied on a buy-and-hold investing strategy, one in which an investor purchases a security and keeps it in their portfolio over a prolonged period. As Buffett says, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
So, when anxiety is high, it’s crucial to keep matters in perspective and focus on your lifestyle goals and how to achieve them. Stability, strategy, diversification—including the implementation of alternative asset classes within a portfolio to diversify holdings and reduce short-term volatility—and basic long-term compounding are all key components of achieving financial wellness. In our view, the best reaction to volatility is usually to do nothing, especially if you already have a sound financial plan in place.
Focus on the financial variables you can control
No one can control the markets, but you can control how you approach them. This is an important conversation to have with your advisor when you’re developing a financial plan, because not only can they help you mentally prepare for downturns in the market, they can also help you understand your risk tolerance and choose what type of assets, sectors and companies fit with your long-term plan.
When you build an investment strategy that accounts for normal market fluctuation, you can feel confident—even during periods of market turmoil—that your portfolio is doing exactly what it was designed to do. A good financial plan is as much about maintaining emotional discipline (the ability to set a course and follow it) than it is about picking investments or making other high-impact financial decisions, such as choosing the right insurance solutions for your needs.
Work with your advisor to develop a strategy and review it over time. As your goals change, so should your plan. And if you don’t have a plan, remember that it’s never to late to build and implement one.
Time in the market vs. trying to time the market
It’s human nature to want to jump in to capitalize on market lows and cash out at the highs, but no one can predict when those will occur.
In fact, it’s virtually impossible to accurately predict the market’s short-term moves. Although there is a chance you may get lucky, timing the market is akin to gambling, and the odds are tilted heavily against you. We’ve all heard the stories of individuals who liquidate their portfolios in a downturn, only to lament missing the eventual market upswing, sacrificing years of portfolio gains in the process.
Rather than pulling out of the markets, consider alternative options to manage risk. If retirement is looming on the horizon, it could be advisable to continue working a year or two longer to avoid sequence of return risk that would see you drawing on a depressed portfolio and fully draining your savings in your living years (increased longevity, while a welcome development overall, can pose significant financial planning and even estate planning risks). That needn’t be a full-time position. Many business owners and professionals transition to lucrative part-time consulting work after leaving their core careers behind.
Trust the experts
Having both the knowledge and nerve to navigate a downturn requires expertise, which is why working with a qualified advisor can help you align your portfolio to your long-term goals and even take advantage of market volatility be seeking alternative investment or tax-mitigation opportunities.
Experienced advisors will have navigated a number of different market cycles—including recessions. Having someone who is objective and can share their expertise during tough times can be extremely beneficial as you work to stay on track. Last point: the best plans are always built using an integrated approach. Financial planners, portfolio managers, accountants and even lawyers should all work together on your behalf to build a strategy that addresses your day-to-day lifestyle needs and goals.
Working with an advisor that can account for these various factors, and ensure your advisory team is collaborating in alignment, will contribute to a sound investment strategy and help you build overall financial health, wealth and wellness.
The Bridgewell Team
To learn more about our wealth and financial planning services, contact a member of our team today.