As we begin 2021, and people speculate on the impact of the new Presidential Administration, could the broader equity markets correct (or, according to the media, crash)? Yes!

Will there be uncertainty in the markets? Yes!

It’s really not a question of if the markets will drop, but when. The real question is, to what extent may the next downturn affect you? Market drops are a regular part of the longer-term investment cycle, and we expect they always will be. The real question is not ‘what will happen’ but ‘will it impact me’? With proper planning volatility can be helpful.

Some people are not hurt by market drops, some are negatively impacted, and others actually benefit from them. The choice is largely yours. What makes the difference in how market fluctuations will affect you is generally how well you plan, rebalance your portfolio and react calmly to those fluctuations. Market drops can provide an opportunity for tax-swaps, shifting from tax deferred funds to tax-exempt and for rebalancing your portfolio.

Market corrections, uncertainty and media hype is nothing new. Neither are the five biggest mistakes many investors make. Here they are, along with our recommendations for steering clear of them.

Mistake #1: Trying to time the markets

It is difficult, if not impossible, to time markets. You have to be right about when to get out and when to get back in. The basic principle of investing says you should buy low and sell high. You want to sell when stocks are dropping and buy when the market begins an upswing. The problem is, unless you have some kind of crystal ball or illegal insider information, you won’t know exactly when to buy or sell.

According to research from Fidelity, the cost of poor market timing could be hundreds of thousands of dollars over your investing career. According to Fidelity’s data, if you invested $10,000 in an S&P 500 index from Jan. 1, 1980, through Dec. 31, 2018, you’d have a whopping $659,515 by the end of that period, assuming you were invested for all of the days in that time frame.*

But if you missed just a few key days, your portfolio would be at least 35 percent smaller — and potentially much smaller than that. And if you missed the 50 best days, you’d have 91 percent less than if you’d just left your money alone the whole time.

Pulling your money out of the stock market and putting it in based on economic forecasts and news is never a good idea. Doing so makes it likely that you’ll miss out on most, if not all of the key days that drive your profits. Again, keep your eyes on your long-term vision. Resist the temptation to react to fluctuations in the market.

Mistake #2: Failing to understand that building wealth over time is not about picking winners or capturing upside, but about minimizing volatility

Investors tend to focus on investment returns, but returns do not tell the entire story. Consider one investment that has averaged 25 percent per year over the past two years and another that has averaged 5 percent. Which one made more? We don’t know; it depends on several factors.

So how do you minimize volatility? By staying your course over the long-term. Instead of focusing on returns and stock prices, focus on how well you’re doing according to the long-term goal you’ve set.

Mistake #3: Focusing on perceived risks and missing the real risks

For example, many people are concerned about market fluctuation, while they should be more concerned about being exposed to inflation risk. They keep money in cash or bonds because it seems safe, but cash and bonds might not keep up with inflation. Another mistake investors often make in this regard is that they often fail to consider interest rates — the risk that bonds will go down in value if interest rates rise.

Work with your financial advisor to determine what real risks you should focus on.

Mistake #4: Having unrealistic or simply wrong expectations

This is true for both withdrawals and returns.

Many times, investors base their expectations on the market’s past performance. In the past 10 years, the S&P 500 returned more than 13 percent on an annualized basis. That’s higher than normal, and it could change at any moment. In 2020, markets were coming off a strong 2019, when stocks and bonds around the world climbed. But for the next year — and decade, in fact — Wall Street is telling investors to set their expectations considerably lower.

Instead of basing your expectations on what the market has done in the past, again, slow and steady wins the race. Consider how your portfolio performs over 10, 20, or 30 years, not year to year.

Mistake #5: Picking the wrong advisor

And that advisor might be you! Some people have the time, knowledge and information to do their own financial planning. What’s tougher, though, is having an impartial view. This is why lawyers do not represent themselves in court, and doctors do not treat themselves. For that same reason, it’s not a wise idea for most people to do their own financial planning. You don’t know what you don’t know! Overlooking the tax consequences of a single decision or investing money in a less-than-ideal way during a particular life stage can cost you dearly. A trusted advisor can help you avoid the first four mistakes and create a plan that meets your needs, risk tolerance and overall vision.

A mistake that’s almost as risky as choosing the wrong financial advisor is having no advisor at all. Why leave something this important up to chance?

Vanguard, one of the world’s largest investment companies, has reported for the past 15 years that there is a quantifiable increase in return from working with a financial advisor. Vanguard calls this advantage the “Advisor’s Alpha.” The company notes that when investors follow certain best practices, the result can be an Alpha in the 3 percent range per year. And a study by Russell Investments, a large money management firm, came to a similar conclusion. Russell estimates that a good financial advisor can increase investor returns by 3.75 percent net of expense annually.

Establishing your financial plan with the help of a trusted financial advisor and sticking to it is the best way to avoid these common mistakes. Financial mistakes are typically costly, and in some cases, they are irreversible. An adage says, “A stitch in time saves nine.” Preventing a mistake is much easier than trying to do damage control once it’s been made!

Our firm has more than 30 years of experience in helping clients. While markets, the economy and investments continue to evolve, we see that people often make the same mistakes without the help of a trusted advisor. Please contact us with questions, for a second opinion, or if we can otherwise be of service. We are here for you. Your vision is our priority.  

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Randy Carver is the president and founder of Carver Financial Services, Inc., and is also a registered principal with Raymond James Financial Services, Inc. Randy has more than 32 years of experience in the financial services business. Carver Financial Services, Inc. was established in 1990 and is one of the largest independent financial services offices in the country, managing $1.94 billion in assets for clients globally, as of January 2021. Randy and his team, work with individuals who are in financial transition as a result of divorce, retirement or the sale of a business. You can reach Randy at randy.carver@raymondjames.com.

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The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Randy Carver and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice.

The S&P 500 index is comprised of approximately 500 widely held stocks that is generally considered representative of the U.S. stock market. It is unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

* This is a hypothetical example for illustration purpose only and does not represent an actual investment. Actual investor results will vary.