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It’s no secret that the first half of 2022 has ushered in a lot of expensive changes for consumers:
- S&P 500 Index drops 20.6% in the biggest drop in the first half of the year since 1970, pulling investors’ portfolios down with it.
- The Federal Reserve in June approved a 75 basis points increase in interest rates in the biggest move since 1994, making it more expensive to borrow.
- Meanwhile, new June data released shows that inflation is hotter than expected, with the fastest year-on-year growth of 9.1% since 1981 – meaning many products and services people buy are more expensive.
As we enter the second half of the year, many investors may be wondering, “What’s next?”
“It feels like there is no good move to make,” said Dan Egan, vice president of behavioral and investment consulting at Betterment. “We’re really hitting an interesting ‘how good people feel’ turning point.”
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The good news is that we may be underestimating our ability to regulate, says Michael Liersch, who holds a PhD in behavioral science and is head of consulting and planning for Wells Fargo Wealth and Investment Management. .
“While we may be resistant to change or we may want to minimize uncertainty, when those things happen, we tend to adapt very quickly,” says Liersch.
However, investors would be wise to avoid major changes to their wholesale finances that they may regret later. But there are three moves that behavioral finance experts say you’ll thank yourself later.
1. Use cash as a ‘blur or dial’ measure when risky
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The best thing you can do for yourself right now is rethink your cash allocation, experts say.
There is one main reason for this. When the market bottoms out, putting cash aside can make you feel better about your personal financial prospects.
If you put all your money into the market, you may find a moment when it feels so unsafe that you want to withdraw, Egan said. Assuming you have $100,000 and allocate $20,000 of it to cash, you’ll invest the remaining $80,000 consistently and efficiently because you know your short-term needs are addressed, he said.
In behavioral finance, the ability to treat different groups of money differently is known as mental accounting.
“Using those mental accounts to give yourself less stress, less worry about what the market is doing, it really allows you to be a better investor,” says Egan.
The big lesson for many people today is that the risk is not the on/off button, according to Liersch. “Having cash is what helps people see cash as a blur or dial rather than an absolute,” he said.
Although there are certain guidelines for How much cash should you spend?, it helps personalize this by giving your own estimates, he said. To do that:
- Look at your spending over the past few years and be really honest, he says. Ideally, this would include pre-Covid cash flows to really get a realistic sense of where your money went.
- Then ask yourself if you have the necessary savings – or access to a line of credit – that could help you get through a protracted emergency.
- With that, determine your need and discretionary spending, and where you can find room to increase your cash reserves.
2. Governing emotional decisions by an unbiased party
Experts often warn that when emotions are high, you tend to make more expensive financial dramas, such as best-selling investments.
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With that in mind, if you’re preparing to make a major financial decision or change your investment strategy right now, try running it first by someone who will be impartial, Egan recommends.
If you feel embarrassed or uncomfortable doing it, ask yourself about a decision you hesitated to share. That could be a sign that it’s not a good idea.
Liersch said, now, other family members to discuss how to make better money working together is also a great idea. Many people provide for or depend on money from other family members, and openly discussing those responsibilities can help address expectations, he said.
If you’re up for action, small movements can help you feel more relieved. That could include taking some of your invested assets and converting them to cash, or pursuing a strategy of losing tax revenue while the market is down, Liersch said.
3. Take a longer-term view
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Just as grocery shopping while hungry can lead to unhealthy decisions, the same goes for snappy financial choices right now, according to Egan. The key is to make a plan that you can stick to.
So if you’re thinking of putting together a mortgage, focus on how you can be prepared to hit that goal in six months and what steps you need to take to reach your goal. me. With your investments, you should remember the reason you’re putting your money aside, whether it’s for your children’s education or your retirement, rather than getting caught up in daily gains or losses.
“One of the basics about human decision-making is that we find ourselves smarter and more ethical when it comes to making decisions about future costs,” says Egan.
It also helps turn off automatic news and market updates on your phone and takes a longer-term view, he says.
For example, if you go back to the front page of a newspaper from 1969 or what is happening on this day in 1856, you will find people have many problems to worry about.
“The names of things change, but the basic reality of being a human doesn’t,” says Egan.
