When dealing with times of heightened uncertainly, we all try as best as we can to try and contain the unknowns in our life. This is especially true when it comes to our personal finances. See three common knee-jerk reactions people often consider that could end up hurting your goals and objectives in the long run!
1. The stock market is extremely volatile so I should probably quit contributing to my 401(k) and/or systematic investment plans until things smooth out!
It isn’t uncommon to fear the unknown when the market ‘waters’ get choppy. Why enter into a market when it’s continuing to flash red? The answer lies deeper than our emotions may allow us to rationalize. Systematic deposits into investment accounts, such as deferring a portion of your salary into your employer-sponsored 401(k), follow the principal of dollar cost averaging and are one of the most proactive things you can do during uncertainty. When the market hits volatile swings, dollar-cost averaging can really help you over the long run of your portfolio. By investing the same amount of money each month into the stock market, you are making investments at an array of prices, meaning a range of high and low purchase prices when volatility is really spiking. On average, you will be taking advantage of some lower-priced entry points which can offset higher-priced entry points and create a lower average cost.
2. I should sell out of all my investments before things get worse!
My favorite old adage explains what a successful investment plan looks like, it’s about “time IN the market, not TIMING the market.” While we like to say our ‘crystal ball’ is fuzzy, there really is no way of knowing what is going to happen next in the market. While we just recently experienced the quickest draw down into a bear market in history, we also know from the past that the market generally heads upward in the long-term. The underlying mechanism of this thought is directly tied to emotions. The biggest mistake you can make is selling out when the stock market takes a beating. By doing so, you are then locking in all presumed losses and giving yourself less ‘gunpowder’ (or purchasing power) to buy back in. Also, considering the emotional-ties to this type of reaction, we often see that people are not ready to redeploy the funds when the true near-bottom of the market hits. It’s common to see people enter into the market past the point of their exit, meaning they ultimately are buying higher than their original exit point and now have locked in losses. During times like this, it is important to realign your portfolio with the appropriate risk tolerance and work with your advisor to make sure your portfolio isn’t keeping you up at night!
3. I keep hearing that mortgage rates are extremely low – I should refinance immediately!
While it’s true that we are seeing low mortgage rates, refinancing isn’t appropriate for everyone. A common misconception is that mortgage rates are tied directly to the Federal Funds Rate. With the constant mentioning of the Fed cutting the Fed Funds Rate to nearly 0%, we cover the option of refinancing a lot. While there is no definite rule to follow, a lot of the decision depends on your current interest rate, the time you expect to continue to live in the house and closing costs. Like your original mortgage, you will have to pay all closing costs to refinance your mortgage, such as origination fees and discount points. Considering the closing costs owed up front, it’s best to speak with your financial advisor for help understanding what your “break-even” point is.
We understand that volatile times make for discomfort. As your trusted advisors, it is our duty to help guide you through difficult times like these. Reach out if things are keeping you up at night and we will help you understand when it’s the right time to make adjustments, and when its best to stay the course. For some of our latest thoughts on the markets, economy and other actions you might want to consider, please listen to our team’s latest podcast here. And reach out if we can help you – or anyone in your network – during this challenging time.