What to do with this “Black Swan?” No, not the Natalie Portman movie.
Author and professor Nassim Taleb suggests Black Swans are events characterized by a surprise that has a major impact. In the investment world, we are living in a Black Swan with a volatile investment market surprised by COVID-19, which has impacted the market value considerably.
The questions we all are asking: “How does this market volatility impact me, and what should I do about it?” At the extremes, you could take it all out of the markets and bury it in your backyard or invest it all in the cottage industry that Black Swan investing has become.
Do not do either of those!
Six Stock Market Tips
Here's my advice:
- Review and focus on your goals. For many of us, our goal is not to have our investment portfolios grow by 10% every year; our goals are to fund our children’s education, a new home, a new car or our retirement dreams. These destinations are the key, and now might a good time to make sure your goals have not changed.
- Understand what you need to do to meet those goals. If studying finance interests you, the online master’s Johnson & Wales financial planning curriculum covers the methods to measure capital needs to meet goals. Meeting with a Certified Financial Planner® may help as well.
- Make sure your investment risks align with your goals. If your goal is to have a new home down payment ready next year, perhaps the stock market is not the best place to hold those funds.
- Continue funding those goals. If you are 40, retirement is 25 years away and retirement may last 20 to 30 years or more. You have time to continue saving into your 401k, IRA, or other retirement plans. And do not touch those funds unless they are the last resource available to you.
- Consider this market downturn as an opportunity. Would you rather be buying into the market with your 401k contributions with the investments priced at $3 or at $2?
- Finally, this downturn is not really that big a surprise. The equity markets have been on an upswing, a bull market, for many years. Most experts expected a correction. I called my 84-year-old mothers’ investment advisor in January and had him take all of her investments out of equities. I felt it was time for a correction and she may not have the time to let it recover. And it really is not a lot of money.
Consider this: Here's how a $10,000 initial investment fared over the past 20 years, depending on if its investor stayed invested or, instead, missed some of the market's best days.
If you reacted to downturns, your annualized performance suffered significantly.
I have also been there, as I told my online students recently in FISV 6430 – Applied Behavioral Finance: In 2007, I inherited some money. Not a huge sum but enough for me to consider how to invest it. My financial planner put together a plan and we jumped in. Of course, then the great recession hit and I lost most of that inheritance. My planner offered many times differing plans to invest what was left elsewhere. I said no – I was going to earn my money back! Had I listened, she would have been right … had I listened.
Take time to reflect on your goals and the journey to reach those goals. Those journeys will have bumps but do not allow those bumps to end the journey. Heck, every so often that side trip is very worthwhile.
To circle back, remember a Black Swan event is a surprise that has a sudden impact. Its third characteristic is that human nature tends to view these events in hindsight as predictable and preventable. I do not know how these current events will ultimately be viewed in history, but I do know we can control our reaction to them.