Financial Crisis Management: Is it Time to Get Out of the Market?
With the fear around COVID-19 and the market crash that comes with it, the knee-jerk reaction for people is to get out before they lose their investments.
But is this the right move?
With news breaking in real-time on networks and on social media, it can be easy to buy into the noise and make immediate and rash decisions based on limited – or even false – information. This is especially true in the stock market and investing world during times of crisis.
The market can be volatile – changing at a moment’s notice. Whether it’s COVID-19, global political concerns, or natural disasters, there are many factors that can cause sudden movement in the markets. But quick decisions based on sudden changes can be costly. How can you be sure your money is safe in your investments?
Uncertainty is Investing Reality
How you handle uncertainty in times like these has a significant impact on your investing outcomes, and panic and overreaction never lead to smart decisions.
As humans, we have a standard psychological response to anxiety that stems from a fear of the unknown. We like having answers that give us a sense of certainty, even if answers are flawed. So when we read or hear an “expert” recommending you drop Stock XYZ, that answer quells our anxiety of losing our money. Moreover, when we learn of expert advice, our brains’ critical thinking engines can shut down, leaving us vulnerable to following advice that may not pertain to our individual circumstances.
How often does an event occur that’s followed by a hoard of investing “experts” sharing their opinions on news outlets? In a 24/7 news cycle, any event that may impact the market is a “story.” But more importantly, it’s a way to keep stories fresh in an industry that’s fundamentally entertainment.
Uncertainty is a foundational truth of investing. If an investment was absolutely certain, investing would be without risk and everyone would invest the same. When financial performance wanes, we tend to let negativity mount and lose sight of the long term and our thoughtful investment strategy. The reason we diversify is to limit the impact of any single negative security or event.
There are a number of recurring topics and events that are commonly discussed in relation to the stock market. How do they affect your investments?
The Effect of Tax Rates on Market Returns
When tax cuts are rumored or announced, investors tend to become more optimistic based on hope that lower tax rates will encourage more consumer spending and business investment. Lower taxes mean more expendable income for individuals and businesses. But the following Bloomberg chart depicts a different reality:
In the 1930s, corporate taxes were less than half the rate they are today and less than a third of their height in the 50s and 60s. Yet the S&P yielded negative returns. Then, as businesses were taxed higher rates in the 40s and 50s, stocks performed well.
With the reported aim of corporate tax cuts from the current 35% rate to 15%, businesses could reap higher profits. Will this lead to even stronger growth in the markets? Will tax reform inspire businesses to invest more money in people, plants, equipment, and other areas that can promote economic prosperity?
How tax cuts are financed can influence the long-term market growth. If subsequent cuts to unproductive government spending finance tax cuts, markets could perform better. If tax cuts are supported by increased government borrowing, it could likely hinder the long-term performance of the stock market. Tax cuts financed by reduced government investment could also lead to market decline.
Simply put, reports of tax reform shouldn’t cause you to diverge from your investment strategy. Nor should a theoretical tax increase compel you to get out of the market. Despite what any investing guru may say, the uncertain future of the stock market and tax cuts is not a signal to adjust your investment portfolio.
When Should You Get Out of the Market?
Especially when negativity runs rampant on financial media outlets, it may be hard to stick to your strategy – it’s human nature, after all. But you have to avoid succumbing to supposed expert advice during market difficulties. There are many scenarios that could play out in the future, and you need to assess the risks and opportunities of shifting your investments.
Your most strategic move is almost never taking all of your money out of your portfolio. Fear can destroy wealth. Instead, you must focus on what you are able to control. First, make sure your portfolio is globally diversified. Then work with your advisor to rebalance your investments on a regular basis.
During a time of crisis, it’s never been more important to work with a trusted, experienced advisor and financial coach who can help you navigate these difficult and uncertain situations. Contact Us and we can help! You can also join a financial education workshop or class to help you feel confident about investing and worry less. See the current calendar.
About Greg Hammond, CFP®, CPA
Greg Hammond is the chief executive officer of Hammond Iles Wealth Advisors, and co-founder of Planned Giving Strategies®. Greg leads a team of professional financial advisors providing customized wealth management and investment solutions for high-net-worth individuals, families, companies, and charitable organizations across the U.S.