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Avoiding Emotional Decisions Will Help You Reach Your Financial Goals

The coronavirus pandemic and resulting market gyrations resulted in one of the fastest bear markets in history followed by one of the fastest recoveries ever experienced. From a closing high of 3,386.15 on February 19th, the S&P 500 dropped 33.9% by March 23rd to a low of 2,237.4. Investors were selling everything from stocks to bonds and even U.S. Treasuries. The actions of the Federal Reserve to help prop up bond markets kept the implosion from getting worse. Many investors were asking themselves if they should bail out and sell to reduce their losses as every day seemed to see massive swings and volatility. Those investors who did end up selling either on the way down or even towards what turned out to be the bottom then missed a skyrocketing climb in equities as the S&P 500 climbed to 2,874.56 by April 17th, a return of 28.5%. As I write this, the S&P 500 is now just about back to where it was at its former peak.

Imagine if you succumbed to your emotions and sold out of stocks into cash as the market crashed. Imagine if, even worse, you sold towards the end, in mid-March. Did you have the foresight to get back in? If so, when? What would make you pull the trigger? Were you too nervous to buy it back? If so, you locked in huge losses and then missed the blazing recovery. During the peak of the pandemic, the media spouting dire scenarios and the economy shutting down with most people around the U.S. and the world sheltering in place and not even gathering with friends, the market was on a tear against all odds. If no one is out spending money on anything other than groceries, why was the stock market skyrocketing? It didn’t make any sense. This is where emotions can get in the way of you meeting your financial goals.

The most important way for you to meet your financial goals is to sit down and think about what it is you want and when you want it. Whether you do this with your spouse, your family or you get the assistance of a financial advisor, everything starts with your goals and what you want. Once you have this in mind, you make a plan. Then execute the plan. And stick to it. Very rarely do things happen in life that will dramatically alter that plan in the short term. Reviewing it on a regular basis, once a year, once every few years even, and yes, when those rare life altering events do occur like an inheritance windfall or a natural disaster, is how you can weather the storm and keep emotion from taking over. Emotional reactions in investing will almost always lead to mistakes, missed opportunities and even worse, failing to meet your financial goals.

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