Four Mind Tricks To Avoid Making Money Mistakes In This Downturn

There’s a lot of fear circulating through the world right now. The depth of illnesses and deaths caused by COVID-19, or the novel coronavirus, has yet to be known. The impact on how society functions, shutting down our way of life has been immense. Even how we view the simple act of a handshake has changed.

It’s not a surprise with all of this unknown, economic turmoil and financial uncertainty that the markets have responded in kind, leading to dramatic falls and short lived rises. The CBOE Volatility Index, also known as the fear index, over the past week has reached highs not seen since the 2008 Recession.

We’re scared, not just for our health, but for our portfolio. And in times like this, it’s when people make mistakes.

For those that seek early retirement or have a plan in place to reach the end of their career at a traditional age, but want to achieve financial independence earlier, what you do in the face of such uncertainty will determine how quickly you reach your goals. Yet, even if you have a plan, it’s not always easy to turn off the television or click away from the next doom-filled headline, since it’s very likely you’re experiencing the same emotions and dread that the rest of the world feels right now.

How, then, do you keep to your long-term plan with all this uncertainty in the market? It’s a question that behavioral finance has tried to solve, particularly in response to the 2008 recession, which saw people lose hundreds of thousands of dollars by pulling out of the market as it swooned.

To manage your fears during this bear market and a potential recession, use these psychological money tricks, to ensure you stick with your plan.

Give yourself some time before making a change

There’s a budgeting tactic for those that overspend on online shopping, where you try to give yourself some time before committing to a purchase. Whenever you have the urge to shop, place the items into the checkout cart, then step away from the computer for 24 hours. If you still need the items the next day, then go forward. If not, then empty the cart.

You can take a similar tactic, as your anxiety around the market bubbles towards making a potential move. You can research what parts of the market you want to divest from then set up the order, but don’t hit execute. Give it at least 24 hours – if not longer – to see if your nerves calm.

This could work particularly well for your taxable accounts, where you likely have a smaller balance. If you’re willing to refrain from moving your smaller account, then you shouldn’t even go near the larger one that’s likely tax sheltered; you’re not able to access the 401(k) until you’re at least 59½ anyways.

If that first line of defense doesn’t work, then before you actually submit the order, remember to calculate the fees and costs associated with reducing the risk in your portfolio. While many investment platforms have instituted zero cost trade fees for certain trades, you’ll need to check whether your planned move will cost you.

While you’re at it, you should also calculate what you might lose, by sitting in cash, if the market bounces back.

Remember what happened in past downturns

Even if you just got your start investing in the lead-up to the 2008 Recession, you likely remember how terrifying the moment was for investors. Over-leveraged banks were imploding, while the government had to step in to prop up the financial system. Even then, the right move for the long-term saver was to simply stay the course.

According to Morningstar, someone with $55,000 invested at the start of 2007, who pulled out of the market at the bottom in January 2009, and stayed out for one year, would have had $195,000 in their portfolio by January 2020. If that same person had stayed the course, without trying to predict the bottom, they would have had $299,000 in January 2020. The results will vary greatly, depending on how your assets were invested, and the allocation of stocks and bonds, but the idea is similar whether it’s 2008, 2001, 1987 or another recession.

On average, it takes two years for your portfolio to regain the losses after a bear market. But if you keep adding to the portfolio during that period, your balance will bounce back faster, since you’re buying more shares at a reduced (that is, bear market) price.

Make it real

For some, simply understanding the arcs of history will help the mind settle. For others, it’s not enough.

“We take the recent and vivid past as a guide for what’s going to happen next,” wrote Morningstar’s head of behavioral science Stephen Wendel. “In investing, that’s sometimes referred to as recency bias. Our first instinct isn’t to think about how markets recovered from the crash of 1987 or the dot com bust—it’s to think about what has been lost within the last couple weeks.”

Wendel goes on to explain that part of the issue with the current drop in the market has to do with how “real” it feels to investors. Since they have to stay in their homes out of fear of contracting coronavirus, they’re, in some way, living the fear they see playing out in the market. It’s why when looking back in history it’s also beneficial to view how markets and life reacted with the Zika scares or another recent illness, since it’s something you, or someone you cared for, experienced in the past few years.

For Zika, a month after the outbreak, markets had fallen 6%. Six months following and the markets had posted just a -0.6% return. The Ebola scare led to a 7.4% drop, according to CNBC, but it had only 3.5% fall after six months.

It’s not surprising, due to the number of people impacted by coronavirus and the stay at home orders and business closings designed to halt its spread, that the falls are deeper this time around. But as long as you believe normal life will return, then you should also believe in the economic system recovering.

Find the short-term positives

It’s easy to allow the mind to go towards a future of Mad Max-esque proportion where the virus upsets all ways of life, leaving us in a prepper’s dream scenario. But do you really believe that’s the most likely result of the virus fallout? Or do you expect the U.S. to pull out of this, once the virus has been contained?

“During times of financial stress, my mantra for investors is to keep a long‑term orientation and remain grounded in the fundamentals,” wrote T. Rowe Price chief investment officer Rob Sharps in a letter to investors.

As long as you have that long-term mindset, then you don’t need to react. That’s true even if Sharps believes we might not see the market bottom for another four to six weeks.

While that might result in poor stock returns this year, it doesn’t mean your portfolio won’t see some benefits as days progress. Recognize that there will be short-term victories, even amidst all this carnage. Vanguard found that 13 of the best 20 trading days since 1979 occurred in years when the market posted negative annual returns. In fact, three-day returns from Tuesday to Thursday of this week on the S&P 500 were its strongest since 1933.

Instead of fearing today’s volatility, consider if the companies you follow, or the markets you invest in will continue to operate? If you believe they will, then there’s not much you need to do, other than continuing to buy.

After all, you will likely see some upside in all of this distress.

This article was written by Ryan Derousseau from Forbes and was legally licensed by AdvisorStream through the NewsCred publisher network.