Savings

S2 E2: Sticking To Your Investment Plan In Times Of Uncertainty

Sticking To Your Investment Plan In Times Of Uncertainty

Staying The Course - Even When It Hurts

In my second episode of Financial Finesse Season 2: What Keeps You Up At Night?, I talk about investing in stocks during periods of uncertainty. And I think we can all agree that things look pretty uncertain right now. The good news is, that doesn’t mean your financial plan needs to suffer. 

If investing in stocks feels scary to you, you’re not alone. Many investors can’t stomach the volatility that comes with investing in the stock market, so they either avoid it altogether or end up selling their stocks when they start to lose value. This presents two problems: first, investing in stocks is necessary for most people to achieve their long-term financial goals; and second, trading in and out of stocks at inopportune times can lead to permanent loss of capital. 

In this episode, I go into some of the technical details of why these two problems occur, but more importantly, I explain why having an investment plan and sticking to it over the long run is the best way to avoid them. I hope you find my message reassuring, and as always, don’t hesitate to get in touch if you want to discuss your investment plan in more detail. 

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S2 E2 Transcript: Sticking To Your Investment Plan In Times Of Uncertainty

00:01

Hi, I’m Cathy Curtis, welcome to Season Two, Episode Two of the Financial Finesse podcast. In this season, I’m talking about what keeps you up at night. And as investments in the stock market are right up there when it comes to things that people worry about, I’m going to talk today about sticking with your investment plan during periods of uncertainty. And let’s face it, how much more uncertain can things get than they are right now.

There are two key money concepts that I’d like to get across to you today, that will hopefully give you greater peace of mind when it comes to investing. One is that you must invest a good portion of your savings in stocks, in order for it to grow, and last your lifetime. And second, how important it is to have a long-term view when it comes to investing.

Now I’m just going to take a brief moment and explain something, a couple of concepts that you’ll hear me talking about a lot. When I say stocks throughout this podcast, I don’t necessarily mean that you can go out and buy individual stocks, that that’s what you’re going to do. Investing in stocks includes investing in mutual funds or exchange traded funds as well, both passive index funds and actively managed funds. And when I say the market, I’m using the S&P 500 as a proxy for the market. The S&P 500 is a stock index made up of 500 of the largest US companies. It’s as good a proxy as any for the US economy and for the concepts that I am explaining to you today.

All right. So in order to accept these concepts, that you must invest a good portion of your savings in stocks, and how important it is to have a long-term view when you do, you have to understand and embrace the fact that investing in the stock market is risky with the capital or the way you know stocks are risky is by their volatility. Markets go up and down day by day, week by week, month by month. Sometimes they go down a lot. And for a longer period of time that is uncomfortable. But that’s a characteristic of stocks. And it’s what we must endure to get the higher returns that stocks reward us with over longer periods of time.

So just to visualize this contrast, investing in stocks to investing your money in a CD, a CD’s value doesn’t fluctuate, you buy it knowing you’re going to get a certain amount of interest. But currently, you’ll get less than 1% invested in a CD with no upside potential. So for example, if you invested $10,000 in a CD, today, at 1%, in 10 years, you’d have a little over $11,000 in 20 years, you’d have a little over $12,000. Contrast to investing in the stock market, with the average 8% return in 10 years, you’d have over $21,000, and in 20 years, you’d have over $46,000. This is a perfect example of the power of compounding interest, and why the higher return you can get from the stock market compounds exponentially over time.

The greater return on stocks is particularly important when you take into account inflation. Inflation means that your living expenses go up year after year, and they’ll definitely be higher in retirement. If you are earning 1% on a CD and inflation is 2%. It won’t be long before inflation as eroded the spending power of the money in that CD. In contrast, if you can earn a higher return on stocks, it will outpace inflation, and keep your spending power intact for your retirement years when you are no longer earning an income or a salary.

When you pay too much attention to the volatility of the market, it’s really easy to get scared and want to sell out to feel safe. This is a mistake because it is too hard to know when to get back into the market. While you are trying to decide you will most likely, proven by many, many studies, miss out on the very best days and hurt your long-term returns. Many people, maybe even you, got scared out of the market in 2008 in the depths of the global recession, and you may or may not have gotten back in. Yes, it took longer than past recessions for markets to fully recover. But by 2013 you would have been back to where you were and probably better off if you had rebalanced your portfolio when the markets dropped.

04:57

According to Goldman Sachs, the 10-year annualized return between 2009 and 2019 was 15%–higher than the normal and one of the highest 10-year returns since 1880. The typical 10-year return since 1880 is 9%. But again, it wasn’t always smooth sailing in that 10-year 2009 to 2019 period. If you recall, at the end of 2018, there was a scary market crash of about 20%. But that has recovered quickly as well.

Let’s just look at this year as an example, when COVID was spreading quickly to the US in February, investors panicked, and their widespread selling of stocks caused the S&P 500 to go down 34%. Since March 26, however, the index has completely recovered and more.

If you were one of the people that panicked and sold, then watched the market go up, up, up, since then, you’re probably thinking, well, now it’s overvalued, so I’m going to sit out longer. This isn’t the way to run a sound investment plan.

So how do you stick with your investment plan in times of great uncertainty? Well, the first step is to believe in your plan from the start. So let’s take the steps. To make a long-term plan, it’s important to write down the kind of lifestyle you want for the future, along with what expectations you have for the next 30 years. Because that’s really why you invest your money, to make sure that you have it when you need it after you retire. And you no longer are able to earn a salary income, your portfolio becomes your source of income along with social security or if you’re lucky, a pension. So you’re making a plan to get there. And I have to say that most people I know don’t want to reduce their lifestyle in retirement. And investing is one way to ensure that you don’t have to.

Secondly, you’re going to implement the plan, which a big part of this is determining the amount of risk you need to reach your goals and invest accordingly. For most people, this means a majority of their money should be invested in stocks. But whether it’s 60%, 70%, 80%, 90%, you need to stay with it and rebalance periodically and ignore the short-term volatility.

Lastly, you need to stick with it. No matter what, stay with your plan. Unless something drastically changes with the United States or global economic systems, history should be a comfort to you.

Now I’m going to talk about why sticking with an investment plan is so important for women in particular. Unfortunately, the statistics show that women are more likely to have a savings shortfall than men in retirement. There are many reasons for this, including the fact that women get paid less than men for the same work, and that women are more likely to be in and out of the workplace because of family care needs. Therefore, they can’t save as much as men over their lifetimes. Until these realities change, in order for women to close the savings gap, they need to have a plan, stay with the plan even in times of great uncertainty, save and invest more than you think you need, and get over the fear of investing.

Thank you for listening. Again. If you’d like to hear more from me, follow me on Twitter: @CathyCurtis, or on Facebook. I have a business page called Women and Money.

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Thoughts on the Covid-19 Induced Stock Market Volatility

It’s hard not to think back to the financial crisis and resulting recession of 2007-2009 when watching the stock market volatility today. That was a painful period for many, especially those who were laid-off, small business owners, retirees, or those planning to retire soon. Actually, it was a pretty tough time for everyone for one reason or another. Afterward, it took years to fix the damage to the financial system and the economy, but the economy did recover.

The Current Market

The current market volatility is unprecedented, but we know the cause. Markets (meaning investors who buy stocks) hate uncertainty and uncertainty exists on many fronts right now. We don’t yet know the answers to questions such as:

When will the rate of infection slow down?
How long will it take to develop a vaccine?
How long will we have to shelter in place?
How long will restaurants, bars, retail stores, and other businesses stay closed?
How will reduced sales affect the profits of companies and their stock prices?
And many more.

It is logical that the volatility will subside once we have answers to these questions. And, our new reality of elbow bumping, hand-washing, social distancing, shelter-in-place, work-at-home practices will undoubtedly help to slow the spread and give experts time to develop a vaccine.

Unfortunately, the wait and this new way of life will come at a cost. The decline in economic activity of all types will most likely lead to a recession if we aren’t in one already. Recessions are painful but they do end and so will this one.

The below chart illustrates past world epidemics and global stock market performance. The MSCI World Index includes the U.S. and worldwide stock markets. You can see that recoveries from bear markets are swift in most cases:

You might wonder whether it makes sense to sell now and get back into the market later. But stock market history has shown that missing out on even a few days of positive market returns can derail this strategy as illustrated in the chart below.

The best course of action right now is to take a deep breath and wait this out. Better times are surely ahead.
Chart from VanguardFurther reading:  Freaked Out by the Stock Market? Take a Deep Breath

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