The uncertainty in the current market environment gives us many things to think about, and it can be challenging to make sound financial judgments. With the continuous drumbeat of concern over political disputes, Federal Reserve monetary/interest rate policy, inflation, and Covid-19, it can be difficult to know how best to allocate ones’ capital. In times like these, it is important to set emotion aside and review some investing fundamentals. Here are a few of my thoughts:
Don’t Panic! Manage Your Risk
There are no 100% guarantees in investing, so all decisions are based on probabilities of outcomes. Because of this, the best investors leave room for the possibility that even their best ideas could be inaccurate. They do this through diversification and risk management, which include 1) Asset allocation, 2) Internal asset selection, and 3) Rebalancing within asset classes. Rarely do you see the best investors make extreme bets during periods of uncertainty as they are never 100% certain about outcomes.
Recommendation: DO NOT be influenced by the financial media as they dazzle you with anecdotes of investors making huge bets! Those strategies are not repeatable and will cause lasting damage to the financial plans of most people.
Prepare to Alleviate Pressure
To correctly manage one’s risk, preparation must occur before uncertain markets arrive. In fact, most retail investors panic during extreme volatility because they did not put in the work to understand what they own, why they own what they own, and how their assets are likely to respond in various market scenarios. There is a saying made famous by an anonymous Navy Seal, “Under pressure, people do not rise to the occasion but sink to the level of their preparation!”
While the consequences of an unprepared Navy Seal are far more severe, the principal is the same. A lack of preparation leaves you more vulnerable under the pressure of highly volatile and uncertain markets. Recommendation: Put in the work to control as many variables as possible that could lead to poor investment decisions.
Ask for Help
If unwilling or unable to put in the work necessary to manage your own risk, look to someone you can trust for financial help. Recommendation: 1) Hire a fiduciary, preferably a Certified Financial Planner™, who is legally bound to operate in your best interest 2) Hire someone willing to take the time to understand your goals and objectives, 3) Hire someone who can clearly articulate an investment approach to accomplish your goals, and 4) Hire someone who is accessible and responsive with understandable updates about your strategy and how it remains in your best interest.
For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the Money Tuesday segment.
