3 cash moves to help minimize uncertainty in the second half of 2022
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It’s no secret that the first half of 2022 ushered in many costly changes for consumers:
- The S&P 500 index fell 20.6% in the biggest first-half decline since 1970, dragging investor portfolios down with it.
- The Federal Reserve approved a 75 basis point rate hike in June, the largest since 1994, which makes borrowing more expensive.
- Meanwhile, recently released June data shows that inflation has been higher than expected, jumping 9.1% year-on-year at the fastest pace since 1981, meaning that many products and services that people buy are more expensive.
As we enter the second half of the year, many investors may be asking, “What’s next?”
“It feels like there’s nothing good to be done,” said Dan Egan, vice president of behavioral finance and investing at Betterment. “We’re really reaching an interesting ‘how good people feel’ turning point.”
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The good news is that we may be underestimating our adaptability, according to Michael Liersch, a PhD in behavioral science and head of advice and planning for Wells Fargo Wealth and Investment Management.
“Even though we may resist change or want to minimize uncertainty, when these things happen we tend to adapt very quickly,” Liersch said.
Nevertheless, investors would do well to avoid big financial changes that they might later regret. But there are three moves that behavioral finance experts say you’ll thank yourself for later.
1. Use money as a “dimmer or dial” on risk
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The biggest favor you can do yourself now is to reconsider your cash allowances, experts say.
There is a key reason for this. As the market bottoms, having a cash cushion can help you feel better about your personal financial outlook.
If you put all your money in the market, you may find a time when it feels so dangerous that you’re tempted to pull out, Egan said. Suppose you have $100,000 and you allocate $20,000 of that to cash, you will invest the remaining $80,000 more consistently and efficiently because you know your short-term needs are being taken care of. in charge, he said.
In behavioral finance, this ability to treat different slices of money differently is called mental accounting.
“Using these mental accounts to give you a lack of stress, a lack of anxiety about what the market is doing, it actually allows you to be a better investor,” Egan said.
The big takeaway for many people now is that risk isn’t an on/off switch, according to Liersch. “Having cash is what helps people see money as a dimmer or a dial rather than an absolute,” he said.
While there are certain guidelines for how much money you should have set aside, it’s helpful to personalize this by coming up with your own estimate, he said. To do this:
- Take a look at your spending over the past two years and be really honest, he said. Ideally, this would include pre-Covid cash outflows to really get a realistic idea of where your money is going.
- Next, 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 this, identify how much spending was essential and how much was discretionary, and where you might find room to increase your cash reserves.
2. Execute emotional decisions by an impartial party
Experts generally warn that when emotions run high, you’re more likely to make expensive financial films, such as panic investing.
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With that in mind, if you’re about to make an important financial decision or change your investment strategy now, try to have someone execute it first who is unbiased, Egan recommended.
If you’re embarrassed or uncomfortable doing so, ask yourself what decision you’re hesitant to share. This could be a sign that it’s not a good idea.
Looping with other family members to discuss how to make the money work better together is also a great idea now, Liersch said. Many people provide or depend on money from other family members, and openly discussing these responsibilities can help ease expectations, he said.
If you are determined to take action, small movements can help you feel some relief. This may include taking some of your invested assets and transferring them into cash or pursuing a strategy of tax-loss harvesting while markets are down, Liersch said.
3. Take a longer-term perspective
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Just as shopping for groceries while you’re hungry can lead to unhealthy decisions, so can impulsive financial choices, according to Egan. It’s important to have a plan that you can stick to.
So if you’re thinking of putting down a down payment for a house, focus on how you can set yourself up to achieve that goal in six months and what steps you need to take to reach your goal. With your investments, it’s helpful to remember why you’re putting money aside, whether it’s for a child’s education or your own retirement, rather than getting carried away by earnings or day-to-day losses.
“One of the fundamentals of human decision-making is that we find it easier to be smart and virtuous when making decisions about future costs,” Egan said.
It also helps turn off automatic news and market updates on your phone and take a longer-term perspective, he said.
If you go back and look at the front page of a newspaper from 1969 or what was happening on that day in 1856, for example, you will find that people had many issues to worry about.
“The names of things change, but the basic reality of being a human doesn’t change,” Egan said.