The year of 2022 began with expensive changes for consumers, especially in the first half like:
- With the largest first-half loss since 1970, the S&P 500 Index fell 20.6%, dragging investors’ portfolios along with it.
- In June, the Federal Reserve increased rates by the largest amount since 1994.
- A new report shows the rate of inflation was hotter than expected in June, rising at the fastest pace since 1981, meaning many products and services are becoming more expensive.
As we near the middle of the year, many investors may be asking themselves, What will come next?
Dan Egan, the vice president of behavioral finance and investing at Betterment said, “It kind of feels like there’s no good move to make,” He further added, “We’re really hitting an interesting ‘how good do people feel’ turning point.”
Michael Liersch, a behaviourist and Wells Fargo’s head of advice and planning, who also has a PhD, notes that while there is great concern that we won’t be able to adjust to increased gas prices, he suspects that we will, in fact, be able to adjust without any trouble.
“Even though we may be resistant to change or we may want to minimize uncertainty, when those things do happen, we tend to adapt very quickly,” Liersch told.
Yet, investors should avoid making wholesale financial changes that they may regret in the future. The behavioral finance experts say you’ll thank yourself later for making these three moves.
Consider the long-term
According to Dan Egan, spur-of-the-moment financial decisions are no different from grocery shopping while hungry. Making a plan that you can stick to is crucial.
If you’re thinking about saving for a down payment, focus on how you can reach your goal in six months and what steps you need to take. Keep in mind the reasoning behind the money you are investing – it could be to pay for your child’s education or save for your retirement. With that in mind, you can maintain perspective with day-to-day gains and losses.
“One of the fundamental things about human decision making is we find it easier to be smart and virtuous when we’re making decisions about future costs,” Dan said.
He added that it is also helpful to turn off the automatic news and market updates on your phone and to keep a longer-term perspective.
If you go back in time and look at the front page of a newspaper from 1969 or a timeline of this day in 1856, you will see what some of the people had to worry about.
“The names of the things change, but the fundamental reality of being a human doesn’t,” Egan said.
Keep cash as a ‘dimmer’ to lessen risk.
At this point, the best thing you can do for yourself is to change how you spend your money, experts say.
The main reason for this is the stock market continues to struggle to find a floor, there is still hope for an economic rebound, if you can manage your cash cushion accordingly.
Basically, if you put all of your money in the market, you will probably at some point be tempted to withdraw. If you allocate $20,000 of your $100,000 to cash instead, you are more likely to invest the remaining $80,000 consistently and effectively since you know your short-term needs are covered, Egan said.
Behavioral finance describes this ability to treat money in different buckets differently as mental accounting.
“Using those mental accounts to give yourself lack of stress, lack of anxiety about what the market is doing, it actually allows you to be a better investor,” Egan said.
Risk isn’t an on/off switch, says Liersch, so it’s a big takeaway for many people now. “Having cash is what’s helping people see the cash as a dimmer or dial rather than an absolute,” he said.
He said there are guidelines for how much cash you should save up for yourself, but that you should come up with your own estimate based on what you think you’ll need. This is how to do that:
- Make sure to scrutinize your expenditures over the past couple of years and be entirely honest, he said. Ideally, this would include a separate disclosure detailing Pre-Covid inflows to create a more accurate picture of how much of your money went to waste.
- If you have the savings necessary – or a line of credit – you could get through a prolonged emergency.
- Find out how much spending is essential and how much is discretionary, and identify where you might be able to increase your cash reserves.
Make emotional decisions with a third party who is impartial
When you’re not emotionally well, such as after a break-up, you tend to make major financial mistakes, such as panic-selling investments.
To that end, if you are about to make a big financial decision or change your investment strategy, you should first run it by someone impartial, Egan advised.
When you are shy or unenthusiastic about sharing something with the world, ask yourself what it is about the decision that is holding you back. It may not be the best idea if that happens.
Liersch believes it is a great idea to involve other family members when discussing how to make money work better now. The majority of people either provide or depend on money from family members, and openly discussing those responsibilities can help smooth out expectations, he said.
If you are determined to take action, small steps may help you feel relief. Liersch said you may want to move some of your invested assets to cash, or pursue a tax-loss harvesting strategy when the markets are down.
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