Guest blog post by Ana Herrero-Wallace
Financial anxiety induced by COVID19
Since March we’ve all been thrown into chaos due to COVID19, and the implications of that on our mental health are still being discovered. One of the aspects that’s cause for concern is personal finance, and yet there doesn’t seem to be a lot out there to help us get through it.
It’s absolutely normal to have financial concerns in such uncertain times, whether you lost your job, are not sure how secure your current role is, or are worried about your investments and how to make it through the storm. Or perhaps due to media coverage, you’re worried about whether or not you should buy/sell, if you’re going to lose money, if you should invest at all or what to do if you already have. These are legitimate reactions to have right now, and we’re all experiencing the uncertainty.
The other week I found myself obsessing about my investment portfolio, which I was checking almost as often as my email. This might not sound weird to you, but to me this is completely nuts. After graduating with a finance degree in the US I started as a stock trader and worked in capital markets, fintech, and have my own financial coaching start-up. So why was I doing something so insane knowing well that having a long term strategy is the best approach?
With such volatile markets, when the market goes up and down erratically, I can get hooked on checking my portfolio for a quick fix. The problem is, much like with social media I was not becoming any happier, even when I was making gains. Of course, it got even worse on the days when my portfolio was losing money…
There is a term in behavioural finance called “loss aversion”. Losses are doubly more painful than gains, and loss aversion is what keeps us from starting to invest as we rather stay quiet than having to go through the pain of potentially suffering losses. If you recognize yourself, you’re not alone.
As with any sort of stress, worrying about our finances and engaging in irrational behaviour, does nothing to help. If we don’t keep it in check our mind can start to get the better of us, and we can start experiencing fear, anxiety, perhaps even losing sleep over these concerns. With so much else to think about, this is the last thing we need to add to the list of stressors.
Staying rational with your finances
For someone that is interested in behavioural economics and the way we make decisions, I recommend reading Dan Ariely’s book “Predictably irrational”. There is a common assumption that we behave in rational ways. But at least when it comes to personal finance, we are often scared of investing, have sleepless nights over losses, or even try to ‘time’ the stock market by trying to predict what it will do in the near future. Yet research shows that we consistently overpay (by buying at the top), underestimate (the potential long term returns of investments) and procrastinate (by not investing today). Making us the predictably irrational beings Dan Ariely so well describes.
As a financial coach I’ve had the privilege to hear the stories of many people in relation to their money and how they behave with it. The question I’ve most been asked recently was: “So should I invest now?” Uncertain times like these make people anxious. If you are thinking of investing or already have a portfolio, then this is for you. The truth is, investing your money doesn’t have to be scary, on the contrary it’s a sound long term strategy. When you think of moments like the one we are going through, they are rarer than the positives, and a good investment strategy can help get you through.
Part of the reason markets are so volatile during crises (such as COVID19) is precisely because too many people are selling as they are worried about the future. But there are ways of investing safely in less volatile stocks, for instance following the S&P 500 index. While fees vary, this tends to be an extremely cheap way to invest. In the last 40 years only 6 years had a negative return as opposed to 32 years (or 85%) of the time positive returns. However, we are constantly reminded of the losses in the market during the infamous financial crisis and technology bubble of the early 2000’s. There are little talks about the fantastic return of 2019 or 2013 though.
I myself have been lucky to have not experienced real financial loss, mostly thanks to a set of tools I have applied that ensure I meet my financial long-term goals.
Coping strategies to bullet-proof your future
When it comes to investment and long term strategies, here is how I try to to “bulletproof” my life financially and cope with downfalls – applicable in any situation (since we know that economic crashes will happen more than once in a person’s lifetime). These are applicable to everyone and should help alleviate some of your financial anxiety. Remember the idea is to stay calm, rational, and make level-headed decisions
- Separate piggy banks. Separate your “emergency fund” from your investment. Meaning that if you need money at hand for an emergency it’s better not to invest it and keep it in cash. That way you can access it immediately without having to worry about its value and how to minimize loss.
- Think long term. Only invest in the market money you don’t need in the next 5 years. Short term investing is a recipe for disaster and it might cost you not just financially but also mentally. If you are wanting to time the market- which means getting in and out depending on what it is doing then for sure you might suffer and create greater anxiety. Always be buying in a regular fashion. You will make money if you have time in the market, not by trying to time it.
- Don’t sell. If you’ve already got money invested, the most important lesson is: don’t sell! Especially in bad times assuming you don’t need the money- this is a bad idea. Don’t get caught up by the hype or the fear and behave irrationally. Only sell when you are due to rebalance your portfolio.
- Diversify. Invest in a diversified portfolio- which means it is composed of a diverse number of countries and industries . This allows you to decrease risk. If you want decent returns over the years then invest in low fee index funds like the S&P500. I have 70% of my money on the Vanguard S&P500 index (VOO). Avoid buying individual stocks if you want to diminish risk and reduce anxiety as your stock could go down to 0 and you could lose everything.
- Be consistent. Invest a little bit every month or quarter despite market conditions. This is the best way to ensure that you don’t miss out.
- Keep calm. Don’t check your daily positions. Try to leave feelings out of investing or you will quickly drive yourself crazy and generate more anxiety than needed.
- Start early. You might be tempted to think you have to have a lot of capital, financial knowledge or time. None of these are necessarily true, with some basic knowledge and a good network a little can go a long way. One way of having less anxiety about money is to start investing as soon as possible: time is your friend and will allow you to compound your money. The longer your procrastination the less time your portfolio has to grow which can make your overall investment strategy more stressful since you’ll be inclined to check it more often. As mentioned, it’s not as hard as it seems and can be really beneficial for your long term financial wellbeing.
- Educate yourself. Clarity empowers people, I believe being in “control brings happiness”. There are many tools online that can help you determine your net-worth, how much money you need for retirement…etc. You don’t need to pay high fees to educate yourself in the principals of investment. You can start with this book for example, Investopedia is another great source of knowledge, and there are lots of podcasts out there too.
Data has proven that markets historically tend to raise. At the beginning of the pandemic in Europe and the US, global stocks saw a downturn of at least 25%, and 30% in most G20 nations. However at the time of writing this blog we are now back again at the levels pre-pandemic. It’s easy to get caught up in the drama and doom and gloom we see in the media, but this shows precisely that things do improve. Don’t get sucked into it and instead remind yourself that there are usually more ups than downs.
A word of advice from a former professional trader. Take a long term strategy when it comes to investments and leave bad news out of the equation- which will not only allow you to meet your financial and retirement goals but will liberate you from anxiety and stress. Focus on the story, not the swings.. I hope these tips can help you feel more in control of your financial situation, therefore alleviating some of the anxiety and giving you the headspace to focus on other parts of your life.
Remember, it’s important to take care of your mental health on all levels, and financial wellbeing is a huge part of that.
Now back to checking my investment accounts! Just kidding 😉
About the author: Ana is a proud member of the Senior Customer Success Manager team at Workday- enabling enterprises to adopt software for finance and HR. As a volunteer she is a member of the Board and VP of finance for PWN- Professional Women Network. She has a passion for tech, partnership development, teamwork, consultative client conversations, and adding value for clients, with 15 years experience consulting and selling to complex and large customers.