Given the market’s dramatic drop this past week, a lot of investors feel they need to just do something. It’s a dangerous instinct.

It is normal to experience stress in any crisis, including a severe stock market decline. But before you do something which you may regret in six months or six years, please read this letter. We are available to speak with clients at any time if you are worried or uncertain. If you know someone who may be feeling that way, please pass this along.

In Investing, a Bias for Action Can Backfire

Whenever the market falls suddenly, it’s because there has been a fundamental development. Too often, investors will have three immediate thoughts:

1. “This is the start of a new paradigm. Our old reality is gone.” The media wants you to believe this. People selling investment products-of-the-day (gold or annuities, anyone?) want you to believe this. Yet history teaches us that new paradigms are rare.
2. “The market will keep going down, because of this new paradigm. People just don’t realize how bad this will be.” Every moment of every day, market prices are adjusting based on the collective wisdom of trillions of investment dollars. Trying to outsmart that collective wisdom is hard – and a bad use of time.
3. “I know the market will eventually recover, but it won’t happen for a while, and I’ll just get back in when it’s safe to buy.” Time and again, we have seen the market recover before the economy recovers. You will almost always be late to buy back in. Most recently, after the 30%+ fall in March 2020 due to the COVID pandemic, the market bounced back entirely within nine months. Our economy and our lives had not recovered by the end of 2020. But the market had. The same thing happened in the great recession. The market rose 80%+ in the 12 months of March 2009 – Feb 2010, just after it had fallen over 50%, and even though the economy was still on its knees. The market is always ahead of reality.

A bias for action in investing typically means that, in a crisis, you sell low and buy back high.

Why We All Have a Bias for Action

From the early days of human existence, our species has needed a bias for action to survive – to protect ourselves from wild animals, to provide food and shelter, to nurture those who depend on us.

This bias for action is pronounced in many of the most successful people. That’s a huge part of what makes them successful. An entrepreneur who mulls over an idea too long will run out of money or see someone else hit the market first. A manager who doesn’t tackle a problem in the office will see it fester and create all kinds of problems. A politician who doesn’t do anything is at risk of being voted out of office.

A bias for action is so important in many spheres of our lives. But in investing, this just isn’t true.

So, What Can You Do?

How can you use your innate bias for action to improve your financial condition?

1. Start with a plan: If you don’t have a comprehensive financial plan, create one, or hire a professional to help you. It should revolve around your financial goals. A plan addresses tax efficiency, estate planning, college funding, liability management, insurance – and, yes, investing. Once you have a plan, that is your lodestar. It only changes when your specific situation changes, not when the stock market falls.
2. Make and follow a budget: Do you have a budget, which – critically – includes saving? If not, make one. Commit to checking it at least quarterly, and to living within it.
3. Harvest tax losses in your taxable investment accounts: If you can sell stock at a loss to use against realized gains and replace the investment with something similar, you will likely reduce this year’s tax bill.
4. Rebalance your portfolio: If your investment portfolio is now out of balance – with a lower percentage of stocks than target – this is an opportunity to get back to your targeted risk level by buying stock at a lower price.
5. Create an estate plan: Do you have an estate plan, and is it up to date? It should include a last will, powers of attorney, an advanced health care directive, and often a revocable trust. It’s so easy to put this off. Sadly, we have seen multiple cases of someone dying unexpectedly without an updated plan. Their families are left with a lot of paperwork and a months-long legal process known as probate – all while mourning the loss of a loved one.
6. Buy the insurance you need: The ultimate example is life insurance. If you need a policy, get it. Don’t wait.

There are always things you can do to improve your financial picture. Make sure they are the right things.