What Investors Can Learn From the Coronavirus

2020 has not been the most welcoming year. Our world has been shaken by the coronavirus and many have experienced the financial tensions it has brought along. Even though we can’t say the coronavirus is completely behind us yet, investors can rule out some important lessons the rocky season has taught us. 

Your Risk Tolerance Matters

Each of us are unique individuals. Each of us think differently and react differently to situations. Therefore, each of us have a unique tolerance toward risk. In other words, the amount of risk we are willing to take within our portfolio looks different for all of us. Aligning your portfolio with your risk tolerance can save you a lot of sleepless nights. 

Recently, the market fell tremendously due to the coronavirus pandemic. Investment account balances dropped, fear roared, financial advisors were googled, and stress was thriving. If your investment portfolio took on too much risk, you may have experienced one of those things. Just because your portfolio and risk tolerance are aligned, doesn’t mean your investment account balance won’t go down or your emotions will be seamlessly composed. Balance changes and the aftermath feelings of a loss are normal within large market fluctuations. However, when the two are cohesive, you will feel more comfortable knowing your portfolio is built to comply with the risk you are willing to take. 

Selling Low = Locking in Losses

Remember the “buy low, sell high” phrase? Well, it’s more than just a phrase - it’s an investment strategy. The owner of our firm, Ben VerWys, said in the midst of the tumbling market and virus pandemic, “your 401k is like your face: don’t touch it!”. Emotions (and germs) were everywhere not too long ago and if you dwelled on your emotions, you may have considered selling investments. Going back to what Ben proclaimed, touching your accounts during a low market period might not be the best idea. Why? It locks in your losses. Think about it: if you get out of the market at an all-time low, not only are you opposing the “buy low, sell high” strategy but you also have no chance to ride the up wave. You lock in your losses when you get out of the market, not giving your investments any chance of recovery. 

I know emotions of fear and stress are always in full swing during impactful market fluctuations. However, if your portfolio resonates your risk tolerance and you understand selling investments at a low point leaves no opportunity for restoration, I believe reigning in those emotions becomes a much smoother process. 

Long-Term Mindsets Are Essential

Have you ever tried one of those games where you get a small zoomed-in part of a picture and have to try and guess what the whole picture actually is? That’s what having a short-term mindset feels like. When we look at one small time frame of the stock market, our judgement may jump to conclusions. When we jump to conclusions in the picture game, we just get our answer wrong. When we jump to conclusions in the market, we may lock in our losses and be on the sidelines - watching the market roar back to life without us. The market goes up and down whether we are ready or not. If you can mentally remind yourself you are in the market for the long haul, not a small sliver or time, you can accept the fluctuation of the market with ease. This is why having a long-term mindset is so crucial. 

If you aren’t close to retiring, zooming out of this dip in the market and remembering you have years and years to recover can save you a lot of stress. The previous lessons come into play here as well. If your risk tolerance aligns with your portfolio, the ups and downs of your account balance don’t lose you sleep. If you follow the “buy low, sell high” investment strategy, you will ride out the market downturn and not be tempted to sell out at a low point in the market. If you have a long-term mindset, contradicting the previous lessons won’t be a temptation. Just remember, sometimes you have to take a step back to see the beauty of the whole picture. 

The events of 2020 have not been the most welcoming, however, the lessons we can take away from them are here to stay. There is still a lot of uncertainty in the world. Will there be a second wave? Will the markets fall again? What else is 2020 going to throw our way? We may not have the answers but we know, as investors, how to push through. Here’s to 2020: the year that, so far, has taught us life long lessons.

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.