Volatility is a natural occurrencereence when investing, but it can cause panic, stress, and costly mistakes if not managed carefullyegully.
Whether you are retired and protecting your fortune, or just beginning your career and growing your wealth, understanding why staying steadfast in tough market conditions is crucial for long term financial success. Relying on four simple “do not” mandates to avoid detrimental mistakes during a market downturn will help support a healthy wealth plan.
1. Do Not Make Emotional Investment Changes
When markets tumble or the economy seems on the verge of collapse, it is natural to feel the urge to sell investments to avoid further losses. However, changing an investment strategy – especially during the trough portion of a market cycle – can derail the projected value of your portfolio and plans for your wealth.
Don't Panic-Sell
First of all, “panic-selling” realizes investment losses and prevents you from benefiting when the market eventually recovers. Furthermore, making outsized adjustments to your investment strategy due to market fluctuations means the investment strategy is not aligned with your goals or time horizon.
An asset allocation should be modified only when goals or time horizons are changed. Instead of trying to analyze the market and time trades, we encourage understanding exactly why you are investing and when you need the money, then implement a strategy that reflects those goals.
2. Do Not Stop Retirement Contributions
During volatile times, it might seem wise to halt contributions to retirement accounts like 401(k)s or IRAs. Whether it be uncertainty, cash flow needs, or just general fear of the market, there are many reasons that might make the idea feel reasonable.
However, there is ample reason to continue retirement contributions during all stages of the market cycle. Purchasing shares of an investment at lower prices offers a greater opportunity for growth compared to shares purchased at historically high prices.
Time Is Your Greatest Asset
For those deferring compensation to an employer-sponsored retirement plan with a matching component, halting deferrals also halts the company match. And for young professionals, delaying retirement contributions can significantly affect the value of your portfolio at retirement age.
The graphic below shows that waiting ten years until age 35 to save, rather than beginning at age 25, results in a portfolio worth $950k less than the early starter. Instead, set retirement contributions to a limit that ensures you have necessary cash flow to live a comfortable lifestyle, and use proper investments to add value over the long term.
3. Do Not Take on New High-Interest Debt
During a downturn it is more important than ever to manage debt wisely. Taking on new high-interest debt, such as credit card balances or personal loans, can strain finances and limit your flexibility. Instead, prioritize paying down existing debt to improve your financial resilience.
If you must borrow, look for lower-interest options and create an efficient repayment plan. There are two reasonable strategies to tackle debt: highest interest rate first, or lowest balance first.
4. Do Not Chase Trends
Usually headlines, unsolicited advice, and self-proclaimed professionals lure your attention away from a sound plan to the latest and greatest fad or tip to weather the market storm. However, chasing trends can be deleterious to a wealth plan that was tailored to your goals and designed to endure market volatility.
Invest Smart, Not Trendy
Popular sectors, individual stocks, or speculative assets can fall just as quickly as they rise, especially during uncertain times. Instead of following the crowd, stick to a diversified investment plan aligned with your specific goals and risk tolerance. Since not all trends are bad, it is best to use “fun money,” or money not built into your necessary living or retirement expenses, to chase the new investment. True wealth is built steadily, not by jumping on every passing trend.
Final Thoughts
Market downturns are challenging, but remaining steady, staying disciplined, and focusing on personal goals can help put the volatility into perspective. By avoiding these common mistakes — panic-selling, stopping retirement contributions, taking on bad debt, and chasing trends — you can emerge from a downturn mentally stronger and more financially secure. Stay calm, stick to your plan, and remember that downturns do not last forever.
Of course, a trusted advisor like LGT Financial Advisors, can help create and manage a holistic wealth plan and walk by you to ensure you stay on track to meet your goals.
To learn more, contact one of our trusted advisors.
