By Barbara O’Neill, Ph.D., CFP®, AFC®
Martie Gillen, Ph.D., MBA, AFC®, CFLE
Financial resilience is the ability of an individual or family to withstand events (e.g., job loss, medical emergency, car repairs) that impact their income and/or assets. These incidents are often costly and unexpected.
Investment resilience is a subset of financial resilience. It is the ability of investors to prepare for, and “bounce back” from, market downturns via diversification and other proactive strategies.
Personal Financial Managers can help service members become resilient investors. Below is a brief description of seven key investing concepts:
- Market Movements– Periodic downturns are normal and well-documented in stock market history. Moving in and out of stocks (or other investments), in an attempt to “time the market,” often locks in losses and prevents investors from profiting from subsequent gains.
- Discipline– Market volatility (e.g., 2022 stock market) refers to sharp price movements that can cause some investors to sell stock in a panic. History tells us, however, that bull (up) markets have beaten bear (down) markets and driven long-term gains. Having a disciplined long-term investment plan is a key to success.
- Emotions and Behavior– Behavioral biases can lead investors astray and there are plenty of them to be aware of (e.g., familiarity, anchoring, recency bias, status quo bias, and the endowment effect). Resilient investors do not allow irrational and emotional biases to cloud their long-term investment plans.
- Compound Interest– Compounding is earning interest on previously earned interest. The amount earned depends on how long money is invested and the rate of return. Money left alone in a long-term, tax-deferred investment such as the Thrift Savings Plan will compound handsomely after 30+ years.
- A Long View– Building wealth takes time. Think decades of making periodic investment deposits and earning compound interest. Resilient investors think long term and purchase stocks, stock mutual funds, and/or exchange-traded funds, for long-term growth potential.
- Diversification– If investors put all their money in one place, their return will depend solely on the performance of that one investment, which could be a loss. Alternatively, if they invest in several types of investments, their return will be a weighted average of various investment returns.
- Portfolio Rebalancing– Investors make unintended bets when they don’t rebalance their portfolio and let it drift with market fluctuations. For example, a 50% stock allocation could grow to 75% over time, exposing investors to more risk than they originally bargained for. Rebalancing keeps investments aligned with an investor’s goals and risk tolerance.
In summary, savvy investors are resilient. To learn more, review the Investor Resilience publication by the U.S. Securities and Exchange Commission.
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