In times of market anxiety, a financial plan can help investors
WEEKLY MARKET COMMENTARY |
The week beginning February 5, 2018 was a wild one for the U.S. Stock Market. During the week, each of the major stock indices closed down more than 5 percent. The Dow Jones Industrial Average lost more than 1,000 points in a single day twice that week. It was the worst week for U.S. stocks since January 2016. By week's end, both investors and casual observers were left asking themselves “what just happened?”
What happened was the eerie stock market calm of the last two years left the building and increased market volatility entered, at least in the short term. Many investors might think that this is a bad thing. One could argue, however, that it is neither good nor bad. The last two years of market calm were certainly enjoyable, but definitely not normal. Current volatility levels are not normal either, but simply the short-term price stock investors pay for higher long-term returns.
If the recent volatility has you feeling anxious, consider that normal. If you are feeling panicked, you might have too much allocated to stocks. Stock prices move in both directions, sometimes very quickly. When downside volatility appears, a financial plan may help keep things in perspective. Hindsight helps keep things in perspective too. Here’s one final statistic for your consideration. The S&P 500 was last below February 9th’s close of 2,619.55, on November 27, 2017, when it closed at 2,601.42, not too long ago.i
Which brings us to a financial plan. Investopedia defines a financial plan as “a comprehensive evaluation of an investor's current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. Most individuals use current net worth, tax liabilities, asset allocation, and future retirement and estate plans in developing financial plans. These metrics are used along with estimates of asset growth to determine if a person's financial goals can be met in the future, or what steps need to be taken to ensure that they are."ii
In times of market anxiety, a financial plan can help investors evaluate the real impacts of short-term fluctuations on their long-term planning. Many times current emotions mistakenly exaggerate the long-term impact of short-term market moves. Having a financial plan gives an investor the ability to evaluate both the short- and long-term consequences.
If you have a financial plan, now would be a good time to review it. If you don’t have a financial plan, now would be an especially good time to create one. You are probably gathering information to prepare your income taxes anyway. Think about how the recent income tax law changes will affect you. Do you have the ability to save more in your retirement account? Do you have a will and estate plan? Have you reviewed it recently? Are you properly insured, whether it’s life, disability, property and casualty, health (including a health savings account), or long-term care? If you have kids, are you planning to fund college costs? Finally, is your sensitive information secure online?
A financial plan will not ensure your success. It will not make you feel good when financial markets behave badly. It might, however, be the difference between making an emotional decision or staying the course. Review your financial plan or create one today; you’ll be glad you did.