The U.S. stock markets have experienced renewed volatility following Federal Reserve Chair Jerome Powell’s speech at Jackson Hole on August 26th. He reiterated the Fed’s aggressive stance on inflation and said further interest rate hikes could lead to slow economic growth and rising joblessness. (1) With the Nasdaq down nearly 7% and the S&P down 5%, many people are understandably nervous. (2)
If you’re like many of our clients, you may be a successful attorney or owner of a law firm looking forward to retirement in a handful of years. You may be wondering how you’ll manage if this volatility continues and Powell’s predictions come to pass. Well, I’m here to tell you that all hope is not lost—as long as you keep your head on straight and avoid these 5 investment mistakes.
1. Panic Selling
With so much volatility in the air, it’s easy to let our emotions get the best of us and make knee-jerk reactions. But selling into a falling market will actually lock in your losses and put you at risk of missing out on the inevitable market rebound. Remember, your investments may lose market value, but you don’t lose any money unless you sell while the value is low.
As difficult as it is to see your investment values drop, especially when retirement is right around the corner, try your best to stay calm and keep the big picture in mind. Fluctuations in the market, and even recessions, are perfectly normal.
This is not the first time the market has taken a tumble, and it won’t be the last. Declines in the Dow Jones Industrial Average are actually fairly regular events. In fact, drops of 10% or more happen about once a year, and 5% drops happen about 3 times a year on average. (3) Panicking over something so common is surely a waste of time and energy.
2. Making Dramatic Changes to Your Strategy
Just as you shouldn’t panic sell, you also shouldn’t make dramatic changes to your investment strategy in reaction to market volatility. It might be tempting to think that your strategy isn’t working and you need to do something else. But beware of making dramatic changes after large moves in the market.
Since the market has historically always rebounded from a drop, investment strategies tend to “revert to the mean.” This means that something that is not working this year may work very well next year when the market rebounds. Constantly changing your strategy during difficult periods puts you at risk of missing out on rewarding periods.
3. Trying to Outsmart the Market
Trying to outsmart the market has been around just as long as the market itself and though it rarely works, many people keep trying. There is a lot of “noise” out there telling us what to invest in right now as everyone tries to predict what will happen with inflation and the overall economy. The truth is everyone has an opinion, and just because they are paid to share it doesn’t mean it’s necessarily accurate or helpful. In fact, commentators are paid to entertain; they are not fiduciaries and they are not there to help you.
Tune out the noise as best as you can and focus on the long term instead. The market is unpredictable and often takes everyone by surprise. Like picking the winning lottery numbers, the odds of picking a winning stock market strategy that never takes a tumble are pretty low, if not impossible. And keep in mind that when things seem the most gloomy is often when they start to bounce back.
4. Buying a CD or Annuity
Guaranteed returns from a CD or annuity (especially equity-indexed annuities) can seem very attractive when the market is low. But when you take a closer look, they are often not great investments over the long term. CDs are still offering very low yields that are below inflation. This means you are actually losing money on a real (inflation-adjusted) basis.
As much as they may be packaged like investments, annuities and other insurance products are not actually investments. Equity-indexed annuities are deceiving products that do not live up to their promises. You may think you’ll be getting a 12% return, but the actual rate you receive is often dramatically reduced through caps, participation rates, hidden fees, and expenses. Stocks often have double-digit returns that equity-indexed annuities are simply unable to capture.
The market will rebound, as history has shown, and when it does, you will miss out on that growth if you are invested in CDs and annuities. Keep in mind that the more the market is down, the more it takes to recover, and the more of a potential upswing you will miss out on. For instance, a market down 20% needs a 25% climb to break even. There is a much greater growth potential in the market than in a low-yielding CD or annuity, which often take a very long time to recoup losses.
5. Not Being Patient
Patience is a virtue, especially when it comes to the stock market. You may have made it through the urge to panic sell or dramatically change your investment strategy, but if you don’t practice patience, then you’re still not setting yourself up for long-term success.
Market downturns can last two to four years or even more, depending on the severity and the surrounding economic circumstances. (4) Even if your retirement date is coming up, it’s crucial to be patient and let the market recover as much as possible before making any significant withdrawals or changes.
A great way to practice patience with the market is to avoid looking at your investments every day, especially if you don’t truly need the money anytime soon. If you are looking toward retirement, a solid financial plan that involves spending less during downturns can help you avoid selling investments at a low.
Are You Making Some of These Investment Mistakes?
Related: Are We in A Bear Market?