The S&P 500 was down over 2% last week, as investors weighed the impact of tariffs. More worrisome is that companies are projecting decreased earnings, as consumer spending declines. Stock prices are essentially the current price we pay for future expected earnings. So, if companies say they expect to earn less in the next few months, we would expect stock prices to fall.
Remember though, that if you are working, a drop in the market is a good thing. It allows you to buy more shares for the same amount of money invested. For retirees, this is a good time to review your portfolio and make sure it’s aligned with your income needs.
There’s a behavioral finance bias called loss aversion that comes into play when the market drops. Simply put, we feel losses more than we do gains, and we remember them longer. Think about the drop in the market in 2008 to 2009 – that was a 53% drop in about 16 months. It’s a visceral feeling. Now consider 2023 to 2024 – when the market was up over 50%. Whatever joy that created wasn’t turned into a core memory the way the financial crisis was. Brain imaging confirms that monetary losses are felt more strongly than gains.
The problem with loss aversion is when we fail to take time into account. As I explained a few weeks ago, the S&P 500 has a strong winning track record over long periods of time. The S&P 500 has only had two times in history when it had a losing ten-year period: the Great Depression and the 2008-09 Financial Crisis. If you have a long time until retirement, but fall to the loss aversion bias, you may invest very conservatively, and your retirement accounts fail to grow. Loss aversion may also cause you to sell at the bottom, instead of patiently waiting for markets to recover. Or better yet, investing more when prices are low.
There are more behavioral finance biases that can impact your long-term financial plan. Some are logical, and your financial advisor can provide education to help you overcome these. Some are emotional, and if education is not enough, your advisor may need to account for them in your long-term plan. Either way, becoming aware of these biases, and accounting for them in your plan, can make a significant difference.
Your action item this week is to check your homeowner’s insurance policy. Make certain that you have sewer and septic back up coverage. It’s considered an endorsement, or add-on, to your policy.
This Thursday is part one of a two-part webinar series to help federal employees update their resumes and LinkedIn profiles. Check out our website at covingtonalsina.com, or our Facebook page, for more information and to see our other upcoming educational events.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.