As vaccines have been rolling out and case numbers dwindling across the country, 2021 seems to bring with it optimism and tentative relief. However, a significant amount of uncertainty still remains. To call 2020 a rough year is quite the understatement, and we learned the hard way that the unexpected can, and at some point will, happen. It’s no surprise that Americans remain skeptical about the future. But this fear of what may (or may not) come is causing many investors to make critical mistakes with their finances. There are four mistakes that have stood out as we’ve met with clients over the last few months.
Letting politics get in the way.
Every election seems to feel more emotional than the last. We see more politically conservative clients becoming exceptionally pessimistic in response to a new administration. Some insist on selling out stocks and others want to allocate most of their assets to more conservative asset classes. But politics, like emotions, should never be the driver of your financial decisions. We’ve witnessed some people bail at the worst time, missing the significant stock rally that began when vaccines were announced the week after the election. The market cares much less about politics than you might think.
Holding too little cash.
Strong market performance, coupled with hearing about their friends and family “playing” in the markets, has some investors putting all of their cash to work in the markets. But this could be putting money at risk that you may need in the short term. I recently spoke with a couple in their mid-30s who bought stocks with all the money they had saved for a pending home purchase, which is extremely risky. Markets are very volatile in the short term. It’s wise to store three to six months of emergency reserves in the bank, along with any funds you will need for expenses in the next 12-18 months.
Holding too much cash.
Just as you can hold not enough cash, you can also hold in excess. Americans on the whole are flush with cash. As a result of multiple stimulus packages, Americans have $3 trillion more cash on hand than they did a year ago. Many investors feel hesitant to spend, give, or invest that cash, due to the high level of uncertainty they feel. Why spend money that you may need due to an unpredictable economy in the future? But cash yields may stay close to zero for the next one to two years, and rising inflation will eat away at the purchasing power of money left in the bank. Consider what your priorities are, and repurpose your extra cash accordingly.
The pandemic forced people to be flexible and ready to restructure at a moment’s notice. School closures, travel restrictions, business restrictions and safety practices often changed weekly, with little to no predictivity. As a result, we adopted a short-term mindset. But the pandemic won’t last forever, don’t forget to look beyond it. We must always plan for the future. As I mentioned earlier, markets are most volatile in the short term. The best financial decisions start with a goal—and the clearer your goals for tomorrow, the better your choices will be today.
They say mistakes are for learning from, and you can use the mistakes others have made to prevent creating a difficult situation for yourself. Be on the lookout for these errors in your own finances. Each one is simple to correct, especially with an experienced and dedicated financial advisor by your side. We can help you prepare for the future in light of today’s changing environment, regardless of what comes down the pipeline.