Financial Wellness

Things You Should Really Focus On (Instead of the Stock Market)

The new normal throughout the COVID-19 pandemic has been a prolonged period of extreme volatility. Although market swings in the short run are expected and completely normal, the awareness of these price swings can lead to abnormal emotional decisions that often lead to bigger problems that can hurt our overall financial health.

Behavioral finance research has demonstrated that our emotions can lead to impulsive decisions that hurt long-term portfolio returns. Most importantly, these fear-driven responses may also be a sign of a lower sense of overall financial wellness.

What can you do when the investment headlines are sending mixed messages of confusion and anxiety? If you are a long-term investor, the best guidance is to stay calm and stay the course when it comes to dealing with market drops. But I suggest using the emotional reactions as fuel to focus on something bigger than the short-term performance of your investments — your financial wellness.

Here are some financial planning best practices you can use to channel those concerns about market uncertainty into action steps that can help improve your financial wellness:

Focus on your financial life goals. The return of market volatility doesn’t necessarily mean you should avoid paying attention to your investments, but it is an ideal time to revisit their purpose. The more focused you are on the “why” behind your investments, the less likely you will be rattled by the “how” to react during periods of extreme market uncertainty.

Setting meaningful and purposeful goals is also an important step on the path to authentic financial wellness so don’t gloss over it. When you set a vague goal like “retire by 50” or “save more money” or a seemingly insurmountable one like “pay off all of my debt,” you’ve already set yourself down the path to failure. Instead, you want your goal to be SMART: specific, measurable, attainable, realistic, and time-sensitive. You should also strive to set goals that are linked to your core values.

Create (or review) your written investment plan. Many professional investors use investment policy statements to set specific rules and guidelines to help manage and monitor portfolios. Individual investors should also have written investment plans, yet few people take the time to put those goals in writing.

Working with a Certified Financial Planner™ professional is one way to get guidance for how to react during a market downturn. Ask them to review your policy statement. If you don’t have one, you can use this basic template from Morningstar. Remember that your investment plan need not be too complicated. You can put your plan in writing using a simple notecard.

Check your account balance less frequently. One way to reduce financial anxiety and increase your overall financial wellness is to stop focusing on daily fluctuations in your investment portfolio. With easy access to account information on smartphones and daily reminders of the market’s performance, it can be difficult to tune out the noise. Reviewing your account less frequently does not mean you should avoid your statements completely. However, if logging into your account is creating financial stress that keeps you up at night, you may need to reduce those check-ins.

How often should you check your account balances and investment performance? This depends on your personality and how close you are to putting those investment assets to good use. For long-term investors, a basic quarterly review is often sufficient while a more detailed portfolio review should occur at least 1 to 2 times per year.

Confirm that your debt reduction plan is on track. In many cases, the cost of borrowing exceeds the average annual return of investments. That’s why it is important to focus your time and energy on reducing or eliminating any high interest debt. If debt reduction is near the top of your financial to-do list for next year, use a debt snowball or Debt Blaster Calculator to see if you are on track to get those credit card balances and other creditors out of your life. If you don’t have a plan, your new year financial checkup should provide you with an excellent place to start.

Ramp up your emergency savings. Keeping a rainy-day emergency fund is the best way to avoid future debt issues. A general guideline is to keep around 3-6 months of basic living expenses in an emergency savings fund. Some people are better suited maintaining an emergency savings fund of 6-12 months of living expenses (especially those in an uncertain job situation or with concerns about the economy). If paying off debt is a current priority, you should at least maintain a starter emergency fund of around $1k-2k even if you are in debt reduction mode.

In addition, consider contributing to a Roth IRA or HSA since these accounts provide tax advantages and may also be considered a supplemental part of your emergency fund. Just be sure to keep your core emergency savings in relatively stable, liquid assets that are not subject to market volatility. Once you have sufficient emergency savings somewhere else, you can then invest that money more aggressively for retirement.

Run a basic retirement calculation. The people who are the most well prepared for retirement are those who set a benchmark and regularly track their progress. Running a basic retirement calculation at least once per year can provide you with some much-needed awareness regarding where you stand with your big picture goals. A retirement estimate also helps you understand how your personal risk tolerance and investment time horizon influence your decisions.

Automate your investment decisions. While technological advancements provide a constant stream of market noise that makes sticking with an investment plan difficult, investors can benefit from easy access to automation. For example, one way to use automation to your advantage is to gradually increase your contributions over time using a contribution rate escalation feature available in many retirement plans. Automating rebalancing programs, tax loss harvesting, and asset allocation guidance are other powerful fintech tools that you can use to help you stay the course during good and bad market cycles.

The short-term performance of your portfolio is less important than knowing if you are on track to reach your long-term life goals. That’s why you should shift your investment portfolio concerns to your overall financial well-being before the next market correction occurs. The action steps listed above are designed to do more than just prepare you for the next market correction, bear market, or global recession. They can empower you to take control of your own sense of financial wellness and in the process, will help you make sure your investments are a good fit for your financial life goals.

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