With all the volatility in the markets lately, you’re probably anxious about your financial life and that’s understandable. It’s important, however, that you don’t allow temporary anxiety to permanently harm your future.
If you fear something bad will happen within your financial life, you have money anxiety.
Perhaps you’re anxious about your job, your income, or your portfolio. These anxieties can easily manifest as emotional behaviors that detrimentally impact your financial future.
The financial world today is hyper-connected, but often lacks context. When you look at the internet or turn on the TV, the shrill coming from the media serves to heighten your level of anxiety. Most of the information you access each day, however, has little to do with your particular financial circumstances.
WHY YOUR PERSPECTIVE ABOUT UNCERTAINTY MATTERS
Ultimately, the quality of your financial life depends upon having an honest perspective about uncertainty. The root cause of anxiety is fear of uncertainty. If you pretend that uncertainty doesn’t exist, you are setting yourself up for continuous surprises and anxiety.
Anxiety and emotions are “why” you behave like you do. Your behavior, in turn, impacts “how” you make decisions and implement plans for the future.
While it’s impossible to totally suppress emotions, it’s important to recognize how they impact your investment decisions. The chart below depicts the emotional cycle ranging from optimism and elation to nervousness and fear.
You can’t completely avoid experiencing the occasional downward path of the market no matter what you do. The broad stock market produces positive returns about 3 out of every 4 years. Despite that, intra-year declines average 14%. A good recent example of intra-year declines is 2020. As the pandemic unfolded in early 2020, the market plunged by 35% but finished the year up 18%.
In periods of heightened uncertainty, you might be tempted to look at your paper losses frequently. Warren Buffett’s business partner Charlie Munger says, “People calculate too much and think too little.” Particularly when this concerns your long-term goals, this surely is true.
HOW MARKET HISTORY QUELLS ANXIETY
While no one can forecast exactly what sharp market declines portend for the near term, looking at long-term market history should quell your anxiety. In periods where markets declined by more than 15%, the next 100 days were positive 70% of the time. This points to the highly resilient nature of the market to adapt regardless of the economic inputs.
If you learn to expect and embrace uncertainty, you’ll be positioned to capture positive long-term investment returns. Almost a century of market data shows that markets experience positive returns over one, three, and five years following a steep decline.
Your money anxiety heightens to the extent you believe bear markets are rare and predictable. Your money anxiety decreases when you acknowledge that down markets are an ingrained part of investing. Start there.
Related: Is Your Financial Life Resilient?