We have all seen the volatility in the stock market this year in the wake of tariffs and rumors of tariffs. It is something that scares many, and that is understandable. Conventional wisdom, however, may not be our friend in times like these. It takes a strong commitment to discipline to weather the storm, but more often than not, it’s going to be the best choice.
Warren Buffett, a well-known investment guru known as the “Oracle of Omaha,” has said, “Be fearful when others are greedy; be greedy when others are fearful.” In times when people are afraid of what’s next and the market goes down, it often creates opportunities for those who are willing to introduce some risk into their investment strategy. In this month’s article, we will talk about behavioral norms and how to overcome the mistakes often made that hamper financial success.
Looking at Your Account Daily
If you are investing for the long-term, you will likely find that looking at your account every single day can be stressful as well as counterproductive. In any given day, (if not week) there is likely to be at least one investment that has a down day. If you are cognizant of that and willing to accept that fact, you can avoid second-guessing or rethinking your strategy in an effort to minimize your short-term losses. Often, looking daily makes us take action that ends up minimizing gains, rather than losses.
Don’t Drop the Anchor
It’s natural for us to anchor on a particular dollar amount and use it as a benchmark to which we create unwarranted fear. For example, if you invested $100,000 on Jan. 1 and it goes up to $107,000 by the end of the year, your brain anchors onto the $107,000 number. If the following month the account goes down to $106,000, you are likely to think you lost $1,000 instead of looking back to our $100,000 and realizing we are still up $6,000.
Short-Term Mindset for Long-Term Investing
If you look at any particular year in isolation, you could feel good or bad, based on that annual market performance, but investing is about the long-term returns. If, in 2022, you had invested in the S&P 500 (considered to be a standard index to gauge the market as a whole), you would have been disappointed, because it was down 20%. However, if you played the long game, the S&P finished 2023 up by 24%. Let’s put some numbers to this example. If you invested your $100,000 on Jan. 1, 2022, by the end of the year you would have roughly $80,600. Taken in isolation, this would sound terrible. However, if you did nothing but wait one year while remaining invested, your account would recover to roughly $102,200. While looking at the two-year span, you might think that you only gained $2,200, but in reality, you were down to $80,600, and the second year provided a handsome return. It not only got you back above your initial investment but also into positive territory. Wait another year, to the end of 2024, and you would have roughly $129,000. Compare that to the person who got out and was waiting on the sidelines with their $80,000 wondering when was a good time to get back to investing.
What’s Ahead?
We don’t know how 2025 will turn out, but investing long-term in the stock market has historically paid off because it harnesses the power of compounding interest and takes advantage of the overall upward trend of the economy. If you are in a situation where you cannot invest long-term, determine your short-term financial needs and put that money where it’s guaranteed not to go down. If you are nearing retirement or presently retired, you might consider putting two to three years of income needs into savings or investments with a fixed return and only exposing your long-term funds to the market.
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If you would like to connect with me, please call 615-619-6919 or email smoran@redbarnfinancial.com; learn more at redbarnfinancial.com.
(Disclaimer: This article is for informational purposes only and is not tax, legal or financial advice. Everyone’s situation is different, so consult a financial advisor. 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. Past performance is not a reliable indicator of future results. The information and data presented is for educational purposes only and derived from sources assumed to be reliable. Investment advisory services offered through Hornor, Townsend & Kent, LLC (HTK), Registered Investment Adviser, Member SIPC, 800-873-7637, htk.com. Red Barn Financial is unaffiliated with HTK. HTK does not offer tax or legal advice. Always consult a qualified adviser regarding your individual circumstances.)
