on June 21, 2022
I’ve been a financial advisor for a long time. I’ve seen periods of rapid expansion and contraction. I’ve witnessed extreme highs and lows in the stock market. Throughout the years, the economy has gone through periods of rapid inflation, average inflation, and even occasionally deflation. When times are good, it’s not difficult for my clients to make sound financial decisions, but when we go through periods of volatility, rational thought can sometimes go out the window.
Those who watch the market’s daily ups and downs can become nervous, and nervous people tend to make irrational decisions (such as pulling their money from the market during a downward swing). However, if my clients trust me and listen to my advice, they remain optimistic and prepared.
Why Optimistic?
Investors who are familiar with the history of our nation’s economy are slow to panic. They understand that economies go through the occasional recession; they get that inflation rates can sometimes rise rapidly. They also understand that, as long as there are vibrant businesses (and consumers to support them), the economy will be okay.
Optimistic investors are also adaptable investors. They assess the current state of the economy and adjust their portfolio accordingly. Many people do not have the financial acumen to make these adjustments on their own, so it’s usually a good idea to call upon a qualified financial advisor for support.
Through economic highs and lows, optimistic investors are forward-looking. They know the nation will make it through an economic downturn or a period of runaway inflation eventually, just as it’s done time and time again.
How Do They Prepare?
During times of plenty, I make sure my clients are prepared to weather the storms ahead. Even though we can never predict what is on the horizon, hard times are inevitable (as are fruitful times!). If, for example, a client is preparing for retirement, we have to make sure they are ready to face difficult economic periods—record-high housing prices, runaway inflation, etc. We have to prepare for the worst as we hope for the best.
Part of this preparation involves creating a robust emergency savings account. It’s helpful to have a certain amount of cash readily available during times of crisis. You never know when you’ll need money for a new roof, a downed tree, or a major car repair. (I’ve discussed emergency savings accounts in past blog posts. CLICK to learn more.)
A prepared investor also has a diverse investment portfolio. When you’re properly diversified, you’re better able to withstand volatility. This is the basic financial principle of not putting all your (nest) eggs in one basket.
Additionally, a prepared investor knows that they will occasionally have to rethink their portfolio. Along with adjusting to the current economy, a person’s goals or life circumstances might change. When that happens, it’s wise to sit down with a financial advisor and discuss potentially rebalancing one’s portfolio.
I am a big proponent of guiding my clients to prepare for tough economic times, even during bull markets and periods of low inflation. A prepared client can more easily be an optimistic client. And optimistic people tend to make smarter financial decisions that are governed by reason instead of fear.