WHILE JIM AND I cooked dinner the other night, we talked about the old cars we drove when we were younger—and how they tended to pull to one side if we took our hands off the steering wheel. We humans have a similar tendency: We head in one direction unless we make a conscious effort to be more rational.
That brings me to the coronavirus and accompanying stock market plunge. We all have gut reactions to news like this. Many of us drift toward fear and even panic. If you find that happening, try these three steps:
1. Have a roadmap. Instead of reacting to the news, each of us needs a plan that’ll keep us on course. As we go from childhood to adult life to retirement, we all have financial goals along the way, things like funding college, building an emergency fund, paying off debt, amassing wealth, starting a business and more. Once we’ve developed a financial plan to take us from here to where we want to be, we need to stick with it, no matter how great the temptation to stray.
For instance, three of my top priorities were saving for my children’s college, paying off the mortgage and retirement. The 2008-09 Great Recession was perhaps the scariest financial time since the Second World War. But at that juncture, my goals were still many years away, so I stuck with my plan. I continued to fund college and retirement accounts, while also sending in extra mortgage payments as often as I could. I had to cut back on luxuries, including vacations, but I kept my priorities dead center.
2. Know your risk tolerance. We need to be aware of how we react during times of stress and then plan for it. For example, when stressed, do you tend to overeat or skip exercise? To counteract these tendencies, you might find an exercise partner, which makes it harder to avoid workouts, while also stocking up on healthy foods, so—even if you overeat—you are at least eating healthily.
Similarly, we all need a portfolio that we can live with through the ups and downs of the financial markets—especially the downs. If we’re taking the right amount of risk, and we know why we’re investing, it’s a lot easier to stay disciplined.
Jim has a higher risk tolerance than me. When we were saving for retirement, his nest egg was invested entirely in stocks, while I had a more balanced portfolio. Today, now that we’re semi-retired, Jim has shifted to be more conservative, so we both own a mix of 50% stocks and 50% bonds.
3. Adjust if necessary. While we all have a tendency to react based on gut instinct, we also have the ability to observe ourselves and correct our behavior.
To that end, ponder how you’ve reacted during the current market turmoil. Do you feel panicked and want to sell? If so, ask yourself: Does your plan need to change based on what you’ve learned about your risk tolerance?
If you’re young and still in the workforce, try to see this recent decline as a good time to buy into the stock market. Indeed, given the current buying opportunity, perhaps your roadmap should be modified, so you increase or even max out your contributions to your IRA or 401(k).
If you’re near retirement and now feel you have too much in stocks, perhaps you need to own a more balanced portfolio. When should you change your mix of stocks and bonds? With the S&P 500 off 27% from its all-time high, this isn’t a good time to sell. Still, you might ease out of stocks over the next 18 or 24 months, unless the market comes roaring back, in which case you should probably shift to a more conservative mix right away.
And if you’re already retired, hopefully you have a roadmap that anticipated a market decline. But if you didn’t, this is a good time to see if your plan needs to change. For instance, should you consider immediate fixed annuities, so you can sleep better at night knowing you’ll receive regular income, no matter what happens in the stock market?
In 2017, Jiab Wasserman left her job as a financial analyst at a large bank and is now semi-retired. Her previous articles include In Withdrawal, Time Well Spent and Those Millennials. Jiab and her husband Jim, who also writes for HumbleDollar, currently live in Granada, Spain. They blog about downshifting, personal finance and other aspects of retirement—as well as about their experience relocating to another country—at YourThirdLife.com.