on February 21, 2022
For the most part, people love certainty. We like to know we can count on the basics—a roof over our heads, food on the table, love from family and friends. We find comfort in familiarity and routine. We enjoy feeling safe, secure, and comfortable. This aspect of human nature has to do with how our brains are wired. Back in the early days of humanity, we had to be sensitive to threats for our very survival (“A bear! Run!”). Those fight or flight instincts are still very much intact, and they apply to all aspects of life, including our sensitivity to financial risks.
Today, we face many unknowns in our daily life. We’re uncertain about what COVID will do next, or what new regulations will be put in place. We don’t know if we’ll have to work from home or be required to go into the office. We’re not sure what the economy will do, or if the supply chain will be problematic for consumers. On top of all that, many of us live with financial uncertainty.
While we can never really predict what the market is going to do, I believe much of our collective trepidation around investing is unwarranted. Yes, the market occasionally dips or slows down. Yes, a particular stock or mutual fund can decline for a time. But overall, there is not much to fear. The market has a proven track record, and those with patience and discretion usually come out ahead.
Just look at the stock market crash of spring, 2020. Investors’ fight or flight response kicked in, they saw the market beginning to decline, and they panicked! Some pulled all their investments out of the market, fearful it would not bounce back anytime soon. In reality, this steep decline could have been prevented if investors remained calm and left their money alone. But, despite all the panic-selling, the market quickly recovered and continued to grow and break records for the remainder of the year.
To combat the urge to sell everything when the market dips, I recommend unplugging a bit. Avoid daily market updates or installing market-tracking apps on your phone. Only check in occasionally, and focus on the big picture, rather than what has happened in the last day or two. In other words, think long-term and stay the course!
In terms of investing, we do face several unknowns that are unprecedented. Not long ago, when you purchased stock in a company, you knew exactly what you were backing. John Deere sold tractors. Herman Miller made boutique furniture. Shell drilled for and refined oil. Ford produced cars. Today, however, many companies are less tangible. What, exactly, does Twitter provide, and how can the company predict its earnings and growth? How does one valuate Dropbox or SnapChat? How can you be sure a certain cryptocurrency or NFT is a wise (and legitimate) investment?
While each client has a different risk tolerance, I usually err on the side of caution. Certainly, don’t put all your eggs in one basket. Who knows what the future will bring for Dogecoin or Samoyedcoin? I certainly don’t!
While investing can be an uncertain venture, understand that some investment models and methods are more tried and true than others. When you invest wisely, think long-term, and trust your financial advisor, you can appease the fight or flight instinct that is so averse to unknowns.