Relevant? Yes. Natural? No.
A look at the similarities between social distancing and investing
As we have all learned, social distancing can be effective in avoiding the spread of a disease by bringing down the rate of transmission and helping minimize or circumvent an outbreak. As I sit here on my birthday, social distancing is the topic consuming the news and hopefully our behavior. Relevant? Yes. Natural? No.
This birthday will be marked by practicing social distancing, isolation really – no gathering to celebrate, no sharing of cake, no blowing out way too many candles. I’m totally okay with this; but it makes me think about the fact it’s not only birthdays we gather and celebrate, but in so many aspects of our daily lives. We’re being asked to change our behavior and go against our natural tendencies. So, what do social distancing and investing have in common?
Both social distancing and investing take discipline and focused intentions. And neither feel particularly natural. When you think about investing, the conversation often revolves around one’s risk tolerance. How comfortable are you seeing your portfolio go down in value? The reality? No one likes to see their investment portfolio go down. That is because portfolios don’t represent the dollar value you see on a page, but the larger life events ahead. Buying a house, remodeling, tuition expenses, a car purchase, travel plans, philanthropy or even our monthly income to meet basic needs – investment portfolios represent our goals and security. These are relevant and important. However, doing a good job at investing will also require actions that go against our natural tendencies, such as fear.
There are ways to counteract the emotional effects of social distancing, much like the emotional side of investing.
Social distancing doesn’t mean isolation or no communication. Reach out to family and friends to stay connected, catch up and find ways to support each other. Similarly, with investing, be sure you are staying connected to real information. Don’t get thrown by the daily chatter and turmoil of the marketplace. What you hear on the news is not likely what is happening with your portfolio as it is diversified and allocated appropriately for those important goals.
We are being asked to consistently keep our distance from each other, not touch our face and wash our hands. Consistency of these practices is what will help ensure success for our actions. A consistent discipline in investing is also key. Sharply moving markets tend to correct sharply, which can prevent investors from contemplating their next move in tranquility. It’s not so much “stay the course” as it is “be consistent.”
There are stages.
Social distancing is only one aspect of controlling COVID-19 and a stage in a process that will take some time. The same is true of investing. The typical bear market is when prices tend to drop 20% or more, followed by a brief rally, and then a drop again. The final stage is the market returning to levels where valuations are more reasonable just as we anticipate a return to less social distancing measures. While we are in each stage, it’s important to keep ourselves focused on our goals and remembering that while it may not always feel natural, we have a pathway forward. Together.
Written By Heidi M. Johnson Bixby, CFP®