It’s nothing new. We are surrounded by articles and media decrying the next recession, correction, or touting end-of-the-world predictions.
There are also articles aplenty about ‘the next’ hot stock, sector, or opportunity that is just waiting for you (if only you write the check).
Financial predictions are as old as the markets themselves. There have always been people who have a strong belief or particular agenda they want you to adhere to; whether it’s a book, newsletter, or investment “opportunity.”
Human nature dictates that when someone shouts, “The sky is falling!” we look up. It plays to our survival instincts and fear. When someone expounds on a “can’t miss” opportunity, FOMO and greed take over; pointing our thinking to the notion that other people must know information that we need. It’s just our wiring.
But in this era of intense media exposure, it’s tough to ignore. My aim is to set the record straight and provide you with useful tools and ideas.
#1: The World Is Not Ending
First. Recessions, corrections, and market turmoil are normal. History shows us that dramatic market declines happen, and unfortunately, companies go out of business or contract severely. History further shows us that the market (as a whole) corrects itself when it reaches a proscribed level where valuations become more in line with reality. There are many factors that lead us into downward markets; some are appropriate (when share prices are unsustainably high relative to expected earnings and profits) and some are completely emotional: a spiraling of fear and mistrust.
If recessions and market corrections are normal, then why get all excited? People get excited because of the speculators, who bet the wrong way, and get hurt the worst. Moreover, those who are taking more risk in their portfolio than they can actually tolerate typically feed the frenzy by selling when the markets get hit. It’s very difficult to take emotions out of risk, which is why so many people act on emotions with their money as soon as fear kicks in. But the bottom line is this: If you are properly invested in terms of risk and time horizon, then you can weather the storm and the fuss and be no worse off.
#2: Look At The Big Picture
Secondly, if you’re concerned about financial instability, instead of letting the media frenzy dictate your moves, take a look at your overall financial picture. The most important things to examine are the following:
1. The amount of debt you carry
2. Your career/job status
3. The amount of liquidity you have outside of your long-term investments
4. Uninsured threats (lawsuits, liabilities, potential big-ticket costs)
5. Your cost of living and how well it aligns with your values.
#3: Take Care of Your Future
Third. Do you have a written financial plan that examines your current financial situation and creates a pathway to your preferred future and goals? If you don’t, it might be because you don’t know who to meet with. You might be embarrassed or feel insecure to share personal information.
My advice: Look for a Fee-Only Fiduciary who doesn’t sell products, have any conflicts of interest, and is properly experienced to help you navigate your financial life. Just like your health care providers have formed a partnership around your health, so too does a financial planner who works in your best interest. Check out NAPFA.org for a list of fee-only professionals that you may want to interview.
#4: Only You Can Form Your Own Beliefs
Fourth. Words have consequences. When you take words into your head and give them power, they can become part of your thinking and beliefs. This process could affect your decision making for the rest of your life.
Be judicious and highly selective about what you read and what you accept as truth. Just because someone wrote it or said it doesn’t make it true. Verify what you hear and see if it’s applicable to you and your situation. Ask questions and avoid making financial decisions based on fear, greed, or lack of information. Gut feelings are not to be trusted; nor are they a substitute for sound planning and an appropriate road map that achieves your goals.
We are subject to what is known as confirmation bias. In other words, we tend to listen to or read information from those with whom we already agree. If you believe a particular stock or sector is the next big thing, you will tend to research all the articles that agree with you, rather than look at counter arguments. Be aware of this very human tendency. Being aware of our weaknesses is a strong practice.
Big, dramatic market changes happen. You should expect them. You’ll see all the predictions, you’ll see all the media, and the chances are great that at some point, a correction or recession will happen.
History indicates that possibility as reasonable, but it doesn’t have to create chaos, panic, or turmoil in your life if you prepare appropriately and make sure you’re knowledgeable. Your life, your money, and your values should always align with your actions to prevent failure.
It’s up to you.