The bad news for investors continues to rise as stocks on Wall Street and TSX continue to fall.
Two weeks ago, the S&P/TSX Composite entered correction territory and the S&P 500 fell into a bear market. On Thursday, the S&P/TSX plunged another 300 points while the S&P 500 posted its worst first-half result in 52 years.
But while it can be easy for your emotions to take over if you have money invested in the market, experts agree that you don’t need to panic if you’re investing in the right kind of portfolio with the right level of risk.
“The wise advice — I don’t remember who said it — is that your investments are like a bar of soap. The more you touch it, the smaller it gets,” author and personal financial educator Kelly Kane told CTVNews.ca by phone Thursday.
When do you make changes to your wallet
If the state of the markets is particularly worrying, it could be a sign that you weren’t in the right risk category in the first place.
“If you can’t sleep at night, you probably aren’t in the right portfolio and this is a good time to talk to your investment advisor,” Keehn explained.
If this applies to you, it may be necessary to eliminate your portfolio risk by reallocating some of your equity and equity investments into bonds, GICs, or savings accounts.
“A lot of people think they can take more risks than they actually can, and that has been very evident now with the cryptocurrency crash,” Christopher Liu, a personal financial expert and contributor to CTVNews.ca, said in a phone interview Thursday. “People have been investing in cryptocurrencies, which are generally considered very volatile and risky. But when things go up, people don’t really care. But now that it has collapsed, a lot of people who couldn’t handle that risk are feeling that pressure.”
Your tolerance for risk can also change based on changes in your life. If you plan to retire or buy a home soon, for example, this may call for switching your portfolio to a less risky one.
“If nothing changes, if it’s just that the markets are going bananas, then leave it alone. But if something important changes…it really changes what you’re doing now. It doesn’t mean you slammed hard on the brakes on the highway and start selling. These things should have some thought.”
Don’t constantly look at your wallet
It can be frustrating to see the value of your portfolio in free fall and experts advise that it is not a good idea to check your portfolio every day.
“If you’re investing in what you should invest in, then you shouldn’t be looking at it,” Keehn said.
While short-term investors may need to review their portfolios more frequently, Liu says long-term investors should only check their money every few months, or if they plan to make any new contributions.
“I would say check it out as often as you can, because if you haven’t needed the money for 10, 20 or even 30 years, there’s no point in checking it every day,” he said.
Constantly checking your wallet can worsen your mental health and cause you to make impulsive decisions, says Steve Jordans, professor of psychology at the University of Toronto’s Scarborough campus.
“You get the information you want, but you can overdo it.” He told CTVNews.ca by phone on Wednesday. “Every moment you spend looking at it will feed your mind and put it in that stressful state.”
While the recent downturn in the market may be painful, Keehn says that in the long run, this is just “a passing picture.” While the S&P/TSX Composite is down nearly 13 percent since the start of April, it’s still rising at an annual rate of 4.63 percent over the past five years and 5.10 percent over the past 10 years.
How do economic diseases affect the brain?
Jordans says an economic downturn can be quite stress-inducing and it can be easy to trigger unexpected emotional reactions.
“When we see downturns start to happen, it becomes a huge problem for us because it becomes a threat. We have a very natural and primitive response to the threat,” he said.
While the frontal lobes of our brain are responsible for rational decision-making, the brain’s limbic system activates the primitive “fly or fight” response when we are faced with a threat.
“Often this works out really well for us,” Jordans explained. “If the bear is ahead of us that’s what we want to happen. We want our primitive survival system to take over and get us out of this.”
But while our limbic systems do well when it comes to responding to something like a bear, they are not well suited to responding to a bear market.
“When you have alien threats, like a crashing stock market, the limbic system is still doing what it always did. It hasn’t changed and it wants you to fight or run. That’s what makes it so uncomfortable,” Jordans said. .
If you feel anxious in the markets, Jordans recommends finding “cognitive palate cleansers” in things that make you laugh and smile, like your favorite TV show.
“Try to change the channel in your mind and the way you can do it is through what you experience in the world,” he said. “The idea here is that you remove the taste of that negative stress from your mind, instead of watching it and then walking away and carrying it with you in your mind.”