man clueless about what to do with declining financial portfolio

Help, My Portfolio Has Fallen and I Can’t Get Up!

Part of the aim of financial therapy is learning to make financial decisions and take financial actions that are in our best interest. This includes funding a retirement reserve, money to support us after we stop earning an income. The most common way to do this is through investing, which can carry a tremendous amount of emotion, especially anxiety.

The feeling of anxiety, for me, starts with the physical sensation of a knot in my stomach. For others it may manifest as worry, nervousness, discomfort, or uneasiness. A lot of people feel anxiety around investing and worry about uncertainties with the stock market, especially when the news is full of warnings about falling markets or a possible recession.

How can you relieve some of that anxiety?

First, let me assure you that whatever you may be feeling around investing is not “good” or “bad.” Feelings don’t directly cause good behavior or bad behavior. You can be feeling happy and joyful and make some really bad decisions, including financial ones. You can be feeling sad, scared, or anxious, and make some really good decisions. Feelings may be difficult or light, but they are not inherently good or bad any more than money itself is good or bad. Feelings are information. It’s what we do with the feelings that can cause a positive or a negative outcome.

At times, more knowledge can help relieve anxiety. Let me offer a few pieces of information that might be helpful.

1. The first thing is to understand that stock markets are inherently uncertain and volatile. There’s never a time that we are certain about future prices in market trends. Markets go up, markets go down. What is certain is that at some point we will have another stock market crash. We just don’t know when.

2. Every investment is uncertain—even cash in the bank. It’s very unlikely that the bank is going to close and you’re going to lose your money. What is uncertain is inflation. You can have money in the bank, and the dollar amount is not going to go down. But what can go down is the purchasing power of those dollars. Suppose inflation is around 8%. If you had $10,000 in your checking account last year, you need 8% more or $10,800 today in order to buy what you could buy for $10,000 last year. If you still have only $10,000 in your account, you have lost purchasing power.

We don’t see this loss of value the way we can see when investments like stocks go down, so it’s hard for our brains to internalize the impact of inflation and the uncertainty of not knowing what money in the bank will buy in five or ten or thirty years. The difference is that purchasing power lost due to inflation is just gone. Investment value lost to market declines has a chance to recover—to go back up and to even keep pace with inflation and protect its purchasing power.

3. The only way a person really has a chance of keeping their purchasing power intact or increasing it is embracing uncertainty and investing in these very uncertain markets. Yes, you can lose your money. However, if you invest soundly, with an eye on history, the chances that you’ll lose money over the long term in a diversified portfolio are small. This means investing in indexes, in mutual funds and exchange traded funds that own hundreds and thousands of stocks. For example, the stock portion of my portfolio is in 12,000 to 13,000 different stocks around the world, so I have no anxiety about things going to zero. 

4. One of the causes of investment anxiety is that parts of ourselves don’t believe that, when investments go down in value, they will ever recover. Those parts fear that our investments are going to become worthless and that the losses will be permanent. However, with any diversified portfolio that goes down, the likely scenario is that in the next year or two, the markets are going to rebound and the portfolio value will recover. This has happened time and time and time again. We’ve had 28 bear markets since 1929. All 28 have recovered. All 28 have hit new highs—some in a matter of weeks, others in a matter of years.

5. Typically, there’s only really one way where a person is guaranteed to lose money in a stock market downturn or when your portfolio is heading down. That is if you sell out.

6. If you’re retired, and your portfolio includes enough cash in a money market fund to cover one to five years of the income you need in addition to Social Security, you will easily be able to weather a one- or two-year market crash. You can withdraw what you need from the money market and leave the rest of your investment portfolio to recover.

My hope is that the information above can help reduce anxiety about investing. If learning more about how markets work does nothing to ease your worry, or the anxiety seems unreasonable or excessive, pay attention to that. It is information that warrants a deeper dive. You may try to tell yourself that you shouldn’t feel anxiety about investing because typically markets recover. It is totally true that they do. Yet the fact that you’re feeling anxious is also true. There is a reason for your anxiety. Something is anchoring that feeling, and it’s probably coming from some type of unresolved trauma from past experiences that has little to do with the current state of the markets.

Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.

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