For billions of years, virtually all living things have been fighting a war against constantly adapting and evolving, invisible enemies – viruses. Viruses are nothing new to humanity. Some of the greatest civilizations in the world have attempted to fight back, but only within the last century have we truly been able to develop and safely use effective weapons like vaccines, thanks to science.
And yet, we know that every time scientists develop a new vaccine targeting one bad microbe or another, the next potential contagion will always be waiting for us, just around the corner. We don’t know where it will come from, what it will look like, or how harmful it may be, but we know it WILL come at some point.
We’re currently dealing with a global economic crisis while simultaneously fighting a global health crisis, both of which were sparked by a new invisible enemy – COVID-19. While the world’s greatest scientific minds race to create a vaccine to resolve our public health crisis, it is our job at blooom to help inoculate our clients and their investments from the invisible enemies of the investing world, knowing that the next new threat is always lurking right around the corner. No needles necessary!
“The reward for work well done is the opportunity to do more.”
– Jonas Salk, creator of the inactivated polio vaccine
Basic instincts drive investing behavior
As humans, our survival instincts are fueled primarily by two competing emotional forces within us all: fear and greed. Fear keeps us from doing overly risky things (or at least makes us think twice) that may cause harm to ourselves. Greed feeds our hunger to achieve, thrive, and generally seek more of what makes us happy, selfishly or not.
Ideally, we would strive to live our lives each day with an appropriate balance between these two internal forces. But when it comes to investing, human beings are simply not wired for success. We’re actually wired to make terrible decisions when it comes to our investments. And yet, just as there are many ways to prevent contracting and spreading a contagious virus, there are also several ways investors can build immunity and help fight back against the battles our own biology will inevitably wage against us when markets get rocky.
“Be greedy when others are fearful and fearful when others are greedy.”
– Warren Buffett
Prevention – Don’t touch!
Various studies have shown that, on average, most of us touch our own face around 16 times every hour. In the last several months we’ve all become far too familiar with just how bad this is for us when it comes to contracting contagious viruses, like COVID-19.
Just as infectious disease experts have warned us all to minimize face touching as much as we possibly can, blooom advisors have been saying the same thing to our clients when it comes to long-term investment accounts, like their 401ks or IRAs.
There’s no denying that a global economic catastrophe feels like the worst possible time to ignore what’s going on with your hard earned money, but that very simple “hands off” approach has proven beneficial time and again throughout the entire history of the stock market.
If you have an appropriate long-term investment strategy in place for your retirement accounts, remember that our instinct of fear that tempts us to sell stock investments and wait out the storm is exactly what causes so many investors to consistently lock in losses and miss out on the robust recoveries that have followed EVERY single US stock market crash in history. That’s right, 100% of them.
This most recent stock market crash proves the point even better than most others. An initial 30% crash in a matter of just weeks has since been followed by a nearly 30% market recovery. Yet, who could’ve possibly predicted that some of the worst unemployment numbers in history would have the stock market sitting less than 10% away from all-time highs? Here is another friendly reminder that the stock market is not the economy and its short-term movements rarely make much sense in the moment.
Unfortunately, we know for a fact that far too many ended up logging into their retirement accounts to sell out of their investments at the worst possible time, only to miss this quick, unanticipated rebound.
Making adjustments to your long-term strategy based on short-term feelings of fear and panic is a temptation we all feel in times of crisis, but it tends to be a recipe for disaster when it comes to your investing goals. Taking emotions out of the equation by sticking to a proven strategy gives you the best chance of reaching your goals over time. While you may find your hands reaching for that keyboard, fight the urge to touch your retirement accounts by making these emotional decisions. Your future self will thank you.
One way to develop future immunity from a virus is through exposure, whether intentional or not (this is not medical advice!). When exposed to a new virus, our bodies produce an immune response to fight back. While the battle can go on for weeks, those that were relatively healthy before exposure are often likely to recover without long-term consequences, or even death. For most viruses, those that survive and recover from the infection end up building antibodies that are designed to detect and prevent future infection from that same virus, at least for a certain period of time, typically several years.
When it comes to investing, sometimes the best way to protect yourself in the long-run is by learning the hard way in the short-run. In the last several months, industry data has shown a significant increase in brokerage transaction volume for many individual investment accounts, particularly among younger investors with IRAs and taxable brokerage accounts. This gives a strong indication that a lot of small balance accounts have been involved in frequent buys and sells of individual stocks and ETFs. Generally speaking, we don’t advise day trading individual stocks or ETFs due to the risk involved, but the temptation to do so is completely understandable, especially after a significant decline in the overall market.
That said, painful but important investing lessons tend to result from times of crisis like this. After all, we are all human and sometimes we simply have to experience the pain of letting our emotions win out in order to understand the bigger picture and have a better perspective next time around. This particular crisis has likely taught far too many the valuable lessons of the difficulty of trying to time the market by selling after a steep decline only to miss an unexpected and robust recovery.
Nearly every successful investor has had to learn a hard lesson along the way, which likely involved them succumbing to their own emotions a time or two. Learning these lessons early can provide a lifetime of immunity that can not only help protect you and your own future, but those around you as well.
As cliche as it may sound, when it comes to investing, if you are humble enough to admit you don’t have a crystal ball that can predict market movements, what doesn’t kill you will very likely make you a much stronger investor over time. Yet, just as a doctor would be unlikely to recommend intentional exposure to a deadly virus, we are not about to suggest that you intentionally try to teach yourselves these lessons the hard way. That’s what we’re here for. But if you happen to make a mistake, as we all have, make sure that mistake becomes the antibodies you need the next time around.
Science has shown that the single best way to prevent infection and spread of a virus is by development of, and widespread vaccination against, that virus. Some vaccines are developed for seasonal viruses, like the flu, which mutate and evolve each year. These vaccines aren’t guaranteed to prevent infection from all flu strains, but they have been shown to at least help reduce recovery time and contain the spread to a more limited population.
With investing, there is no magic potion or vaccine to protect you from your natural instincts or the constant noise of stock market media hype. But that doesn’t mean you can’t greatly reduce your risk of making mistakes that could take years or decades for your portfolio to recover from.
The greatest threats investors face are probably most comparable to the seasonal flu. Each year different strains of the flu evolve which require new vaccines to protect against. Likewise, investors can expect a brand new, often unanticipated threat to attack their investments year in and year out. The best thing you can do as an investor is to understand that the threats against you are always evolving and that there are time-tested methods to protect yourself, or at least help mitigate our risks. Ask your advisor questions (if you have one). Stay focused on the long-term. And tune out the distractions of the financial media.
Seek the best primary care
Finding a doctor you can trust can be difficult, but those that do tend to live healthier, happier lives. Knowing that you have someone in your corner is essential when it comes to opening up about your own health issues, as they arise. While many of us try to avoid going to the doctor until we absolutely must, we know that in most cases they will be able to give us the best medical advice or treatments for whatever is ailing us.
Inoculating your investment portfolio means taking emotion out of the equation using technology and automation, implementing a proven long-term investment strategy that’s appropriate for your age and risk tolerance, and finding an ally you can trust in the fight to keep you on track when times get tough, at an affordable price. Each of these are the very reasons blooom was created in the first place.
While humanity races to defeat this Pandemic, know that you and your investments don’t have to succumb to internal forces inside of us all that often work against our financial well-being in times of crisis. Uncertainty is the greatest certainty there is when it comes to investing. And it’s actually that uncertainty that tends to reward those that fight through their natural instincts to guess the market’s next move. Sometimes all it takes is the comfort of a conversation or knowing that you have a plan in the first place.
If you feel lost when it comes to your retirement investments, have been stressed by the recent ups and downs of the stock market, are unsure if you’re investing appropriately right now, or just need to talk to someone about a better strategy going forward, don’t hesitate to reach out to our advisors. We’re here to help you!
The information is provided for discussion purposes only and should not be considered as advice for your investments. Investing involves risk. Your investments are subject to loss of principal and are not guaranteed.
Published on May 29, 2020