The Difference Between Speculating and Planning

A week ago, I came across a chart that does a nice job representing the call volume we have been experiencing at Human Investing in 2020. While the amount of calls we receive does not equal the amount of times people search for CNBC, the two data points are certainly correlated.

The image is titled, “When Markets Fall, We Search”, and ultimately shows that individuals have been more likely to seek out CNBC (market related news) any time the market has fallen over the last 15 years.

I’d argue that you could replace ‘search’ with ‘speculate’ and both the phrase and the chart would remain true, “when markets fall, we speculate”. Given the state of current affairs and the upcoming presidential election, individuals are worrying about their retirement accounts. A growing number of conversations our team has with individuals inside of retirement plans sound something like this:

Caller: “I’m fearful of (X) candidate winning the election because I’m affiliated with (Y) political party (both sides are saying this). Additionally, there is uncertainty around COVID, and I don’t feel comfortable staying invested during these unpredictable times. I’d like you (Human Investing) to help provide me with a more conservative investment recommendation.”

Before I respond with market research, I want to reiterate that you aren’t alone with your concerns and fear. We hear you. At the same time, before making any decisions related to your portfolio, take the time to think through all the angles of your decision. The rest of this post will hopefully provide some anecdotes in your process. Here are few thoughts about what it looks like to plan for the end of 2020 and into 2021. Remember, it is better to plan than to speculate.

THE CORRELATION BETWEEN YOUR POLITICS AND YOUR PORTFOLIO

Generally speaking, there is low correlation between political parties and the stock market. However, that statement is easy to say and difficult to live out in practice. Tread lightly when reading articles that try to align which stock/sectors to own with the political party that takes office. This article from 2016 couldn’t have been more wrong prognosticating that energy companies (specifically Exxon Mobile) would be top performers for the proceeding four years. It goes without saying this was a massive miss.

THE BIGGER INFLUENCE: ARE YOU A SPECULATOR OR PLANNER?

If you think like a speculator, you will make rash decisions around your investment accounts and have no plan for re-entering the market if you move your dollars to cash or to a conservative investment.

If you think like a planner, you will use both quantitative and qualitative measurements to evaluate your decision. For example:

If you have a long-term horizon (greater than 15-20 years), political changes should not impact your investment decisions.
Irrespective of the political environment, review if your account is too aggressive or too conservative for your financial landscape.
Have a clear understanding of both candidate’s tax policies. Changes to the federal tax code should be a factor in your financial planning for the remainder of 2020 and into the future. If you are working with a CPA and/or Financial Advisor, make sure they are staying abreast with any impactful tax code changes.
- Biden Tax Proposal
- Trump Second Term Tax Ideas

DITCHING THE MARKET

Trying to time the market when negative news arises (or the anticipation of negative news) is a dangerous game to play. Luckily, we have a recent case study of how dangerous it can be. From January 1st to March 23rd, the stock market fell 30%. Since then, the market has recovered all losses and then some. If you were thinking like a spectator, it would have been easy to create a narrative around mid-March to pull your money out of the market and wait for greener pastures. If an investor did so, most likely that investor is still waiting for the market to dip and has missed out on the recent recovery as indicated by the second chart.

If you think like a planner when the market is more volatile, sometimes taking some form of action itches a behavioral scratch. Here are some ways to take action while not compromising your account:

Raise your contribution in your retirement account to take advantage of a decreasing market (buying more shares at discounted prices).
Open a small “fun money” account to track if your predictions are correct.
If the market does significantly drop, look at converting pre-tax dollars to ROTH.

The concept of thinking like a speculator vs. thinking like a planner represents the cultural moment we are living in right now.

Speculating = headlines, fast moving social media, and the potential for instant gratification.

Planning = well thought out strategies that take time and often require no action.

As always feel free to reach out to our team to talk through your thought process. We are happy to help!

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Andrew Nelson
Andrew is passionate about diving into the details of organizations and how they serve their employees. Working with companies, increasing the financial literacy of employees and committees and stretching employee benefit dollars are at the core of what Andrew and his team get excited about.