3 money moves to help ease the uncertainty in the second half of 2022

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It’s no secret that the first half of 2022 has brought a lot of costly changes for consumers:

  • The S&P 500 index fell 20.6% Biggest drop in first half Since the 1970s, it has been dragging down investors’ portfolios with it.
  • Federal Reserve approved in June 75 basis point rate hike In biggest move since 1994, Borrowing has become expensive.
  • During this, Recently released June data shows that inflation was warmer than expected, with a 9.1% year-over-year jump at the fastest pace since 1981 – meaning that many of the products and services people buy are more expensive.

As we move into the second half of the year, many investors may be wondering, “What’s next?”

“It doesn’t seem like a good move to make,” said Dan Egan, vice president of behavioral finance and investing in Betterment. “We’re approaching a really interesting ‘how good people feel’ juncture.”

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The good news is that we may be overestimating our ability to adjust, according to Michael Lirsch, who holds a PhD in behavioral science and advises and plans for Wells Fargo Wealth and Investment Management.

“While we can be resistant to change or we want to reduce uncertainty, when those things happen, we adapt very quickly,” Lirsch said.

Still, investors would be wise to avoid large wholesale financial changes that they may regret later. But there are three tricks behavioral finance experts say you’ll thank yourself for later.

1. Use Cash at Risk as ‘Dimmer or Dial’

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Experts say the biggest favor you can do yourself now is to rethink your cash allocation.

There is an important reason for this. As the market approaches the bottom, setting aside the cash cushion can help you feel better about your personal financial outlook.

If you put all your money into the market, you may have a moment where it feels so insecure that you’re tempted to withdraw, Egan said. Let’s say you have $100,000 and instead allocate $20,000 in cash, you’re going to be investing the remaining $80,000 consistently and effectively because you know your short-term needs are taken care of, he said. .

In behavioral finance, this ability to treat different buckets of money differently is called mental accounting.

“The lack of stress by using those mental accounts yourself, the lack of worry about what the market is doing, it really allows you to be a better investor,” Egan said.

The big takeaway now for many people is that the risk isn’t an on/off switch, according to Lirsch. “Having cash helps people see cash as a dimmer or a dial,” he said.

While there are some guidelines for how much cash you should have set aside“It helps to personalize it by coming up with your own estimate,” he said. to do that:

  1. Take a look at your spending over the years and be really honest, he said. Ideally, this would include pre-Covid outflows to know exactly where your money went.
  2. Then ask yourself whether you have the necessary savings — or access to a line of credit — that can get you through an emergency in the long run.
  3. With that, identify how much spending was necessary and how much was discretionary, and where you can find room to increase your cash reserves.

2. Drive Emotional Judgment by the Unbiased Party

Experts generally warn that when emotions are high, you are more apt to make expensive financial movies, such as investing in panic.

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With that in mind, if you’re preparing to make or change a major financial decision with your investment strategy right now, first try to run it by someone who will be unbiased, Egan recommends.

If you feel embarrassed or uncomfortable doing so, ask yourself about the decision you are hesitant to share. This may be a sign that this is not a good idea.

Lirsch said it’s also a good idea now to discuss how to work together with other family members. He said many people either provide money from or are dependent on other family members, and openly discussing those responsibilities can help meet expectations.

If you’re ready to take action, small moves can help you feel some relief. Lirsch said this could include taking some of your invested assets and moving them to cash or adopting a tax-loss harvesting strategy while the markets are down.

3. Take a Long Term View

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Just as grocery shopping when you’re hungry can lead to unhealthy decisions, the same goes for financial choices, according to Egan. It’s important to have a plan that you can live with.

So if you’re looking to make a down payment for a house all at once, focus on how you can be ready to achieve that goal in six months and what you need to do to reach your goal. Steps have to be taken. With your investments, it helps to remember that you’re missing out on a reason to set money aside, whether it’s for a child’s education or your own, rather than getting bogged down in day-to-day gains or losses. for retirement.

“One of the fundamental things about human decision-making is that we find it easy to be smart and virtuous when we’re making decisions about future costs,” Egan said.

He said it also helps to turn off automatic news and market updates on your phone and take a long-term perspective.

For example, if you go back and look at the front page of a newspaper in 1969 or what was happening on this day in 1856, you would find that there were many issues for people to worry about.

“The names of things change, but the fundamental reality of being human does not,” Egan said.

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