The aftermath of the 2020 presidential election has caused tremendous anxiety regardless of your political leanings. Even with markets having roared higher in the week of the election, tensions among investors are still running high. It's completely natural to want to make adjustments to protect yourself, and this especially rings true when it comes to your retirement savings and other market investments.
It's always crucial to manage your emotions and avoid making adjustments to your investments in any challenging situation -- even if it means exercising a superhuman level of self-control. Below you'll find four reasons to stay calm should the market tumble in the coming days and weeks.
1. Market volatility is normal
By agreeing to invest in the stock market in the first place, you implicitly sign up for volatility. In other words, you understand that market values fluctuate day to day and you are willing to accept that risk for the promise of inflation-beating long-term returns. If you see your index funds fall by a few percentage points in a single day, it's important to remember that this is nothing more than a benign by-product of everyday investing.
Image source: Getty Images.
2. Reaffirm (or rethink) your asset allocation
Before taking market risk, it's important to have a written financial plan, including an asset allocation that reflects your need, ability, and willingness to take risk. If the market crashes and you immediately run to sell your underperforming investments, you'll have glaring proof that you were taking on too much risk in the first place.
If, however, you see the market fall and simply change the channel or swipe to a different app, you can rest assured you're at least minimally comfortable with your assets as they are currently positioned.
3. The market always goes up
On any given day, you can see the major market indexes fall precipitously, but over the long term, this is exceedingly unlikely. It may seem difficult to conceptualize if you follow the market on a day-to-day basis, but the broad market averages have never had negative returns over any 20-year period in history. Rather than becoming anxious over market movement on a particular day, it's best to reframe your focus and look to the future, knowing that the chances are significantly in your favor that market prices will end up higher than when you originally invested.
It's also best to avoid trying to move in and out of the market, hoping to sell out at the highs and buy back in and the lows. This is called "market timing," and there is not considered to be any strong evidence that it works. Market timing, which is really just an emotional reaction to the unpleasant feeling of paper losses, can be avoided by carefully deciding how much market risk you are willing to take and implementing an asset allocation that reflects it.
4. It's out of your control
When we see significant declines in stock prices, it's human nature to want to immediately sell your stocks and go right to cash. This is a mechanism of self-protection: We see danger, and we seek to avoid it. While this is a valid way to feel, the degree to which you're able to practice self-control will be a strong predictor of your long-term investment success.
The best way to handle the emotional swings of investing is to understand what is within your control and what isn't. It's in your control to save at regular intervals regardless of what's currently happening in the market, and it's also within your control to regulate the amount of financial news you consume. It's also well within your control to manage the amount of market risk that you take as a share of your overall asset allocation.
Because markets have become increasingly efficient (that is, market prices instantly react to new information), future movements are not only unpredictable, but entirely out of your control as an individual investor. Avoiding this illusion of control is a necessary step in quelling emotional decision making and catastrophic worries over the direction of the stock market.
Keep your long-term focus
In the social media era, it can feel like everyone and everything is vying for your attention -- because, of course, they are. The stock market is no different: Wild stock price swings can be alarming and attention-grabbing, but it's in your best interest to maintain your focus on the long term.
A decision based upon inflamed emotion has great potential to derail any sound retirement strategy, which is why a written financial plan outlining an appropriate asset allocation is your best option for achieving your money goals. Following such a plan will limit worry and provide much-needed peace of mind.
