With summer 2017 in the books, and cooler weather on the way, the world continues to heat up. The uncertainty in our country and world can create fear and anxiety for our finances and for our money invested in the stock market.
Controversy in Washington, the threat of nuclear war, wild weather, uncertain markets to name a few, can create an unsettled feeling for us and our money.
But when it comes to the economy…
When it comes to our money…
When it comes to the stock market…
We just don’t have a crystal ball (boy wouldn’t that be nice!)
The unknown and what we can’t control
The problem with focusing too much on the uncertainties and the unknown, is well, that it’s unknown and at that most of the stuff that creates anxiety is out of our control.
Rather let’s focus on what we know and can control. In the context of our money, if there are truths or facts that we can hold on to then that’s where our focus should lay.
7 truths about the market and planning I was reminded of on my beach trip
On my family’s annual beach trip, I was reminded of a handful of these known truths and facts in the context of investing and financial planning.
I hope to you find these helpful in this time of uncertainty and that these truths and facts give you comfort as you plan for an unknown future, and you invest in a fickle market.
1. The more risk you take, the potential for more reward…but be careful not to crash.
On a visit to the Naval Aviation Museum in Pensacola, my son and I caught a video highlighting dive bombers in the Pacific theatre during WWII. These bombers had to be borderline nuts!
To have the best chance of hitting their target, say a Japanese battleship, these pilots would dive their planes, usually at a 70-80 degree angle directly at their target.
They’d drop their bomb and pull up abruptly, often at the last minute. They took great risk to reap the reward of blowing up their target. Some of them hit their target, some did not, and many crashed.
In investing if you want to hit your target, say retirement, you have to take risk. You cannot avoid risk. Luckily you don’t have take “dive bomber” type risk! We have ways of investing to minimize risk to the point at which you can be comfortable.
Certainly, the more risk one takes the more potential reward, but in all my years in this industry, I’ve only worked with one client who was “Dive Bomber”. His dictate to me literally was “I’m going to war. Invest my money as risky as possible. I don’t care if I lose it all.”
The majority of us though are not willing to “Dive Bomb” to reach our goal. How much risk are you willing to take (or not take) to reach your goal? If you have not had that discussion with your advisor, now is a good time to do so.
2. The professionals are not always right.
We had 2 fishing trips cancelled because of the weather. Both forecasts for the day were dead wrong.
I am always amazed, but not surprised, that economists, chief investment strategists and the guys on TV calling the markets can have such divergent views of their forecast of the market (kind of like meteorologists!).
Even though they get paid big bucks, it is impossible for them to all be right at the same time, as their views are so often mutually exclusive. I visit several websites daily to check up on news as it relates to investing. I am shocked by how headlines can be so opposite. Not only are headlines so opposite, the articles seemingly give compelling evidence for the author’s viewpoint.
So who do you listen to? None of them, really. They don’t know you. They don’t know your situation. They don’t know if you have emergency funds saved up or if you’re in a high tax bracket. They do not know the investments in your portfolio.
If you invest based on your risk tolerance and your need for the said money in the future, it really doesn’t matter what the professional market callers are saying. 97.5% of what they are saying has no direct impact on you whatsoever anyway. So why even listen?
3. Investing is not just about the upside (gains). Downside protection is equally important.
The beach trip is a highlight of summer. My family loves the sun, the ocean, and the pools. But if we ran out every morning to the beach, and the pool, to tackle the day’s adventures, we’d be in serious trouble.
If we didn’t take the time to lather up with suntan lotion, grab our sunshirts and sun hats (especially those of us with less hair), we’d be in a heap of trouble and, sooner or later, we’d be regretting the fact we did not take the time to protect ourselves.
If you just jump into the market without a plan to hedge your portfolio in bad markets, you may get burned. In good times, like we see now, where the markets are at record highs, it’s important to check on your portfolio’s downside protection. Downside protection is the suntan lotion for your portfolio.
Diversification, active management, re-balancing, dollar cost averaging are all ways to help on the downside. But just like the suntan lotion, apply often…
4. Investing is for the long-term.
A family member asked my wife, “How do you do this for a week with kids?” To which my wife responded, “You pace yourself.”
We spread out our activities over the week. We don’t do everything fun in one day. We take breaks from the sun and try to keep the kids on some semblance of a routine.
Most people who have success in the stock market make their money over the long term. Not in one year or even 5 or 10. Pace yourself. There will be bad markets and good markets. Stay consistently invested over the time period according the strategy and risk tolerance you are comfortable with. Wealth is built over time in the market.
5. Just ‘cause you have fresh memories of bad things happening in the market, doesn’t mean bad things are going to happen in the market.
Shark attacks rarely happen. I’ve been going to the beach and swimming in the ocean my entire life and I have never been attacked by a shark.
But every single time I set foot in the ocean and especially when my son wants to swim out to the sandbar, sharks are on my mind. More than likely it has to do with the fact that Shark Week always airs the week before our beach trip. It’s on my mind, so mentally the likelihood of an attack is greater.
This phenomenon is known as Availability Bias, that is the idea that people tend to heavily weight their decisions toward more recent information, making any new opinion biased towards the latest news.
So if you’re watching negative news, particularly as it relates to the stock market, you are more likely going make investing decisions as a result of your bias and opinion.
Don’t let negative hype keep you from participating in the stock market. Rather apply prudence when you invest. Statistically we know that well diversified portfolios are a good defense against market volatility.
Make your financial and investing decisions by wisely discerning the facts rather than on the most “vivid event” in your mind or on the most readily “available news”. If you do this you will find it will lead to better results.
6. You have a better chance of investing success if you keep your emotions in check.
The car was packed and we were ready to go. We were loading the kids up to hit the road. And the car wouldn’t start. We troubleshooted unsuccessfully. We called roadside assistance to see if they could get us going. In the meantime, a broken-down car was not going to keep us from the beach, so my wife and I discussed our options from renting a car to borrowing a car. Luckily roadside assistance came through.
In a moment where all of us were disappointed and our emotions could have easily overtaken us, we kept our cool.
My wife and I were high-fiving each other for keeping our emotions in check.
There are many reasons to get emotional with the market such as political uncertainty, talk of nuclear war, racial tension in our country, trade wars, natural disasters etc.. However, the market historically has rewarded those that keep their cool and don’t react to their emotions.
Keep your emotions in check and you’ll be high-fiving your future self. Remember investing is for the long-term.
7. Your financial plan has to be YOURS.
As much as I love the beach, I love sleeping in my own bed, with my own pillow. My bed and pillow, for me, is as comfortable as it gets. In fact more often than not when I travel I lament not having my pillow.
Your financial plan has to be yours. Not Dave Ramsey’s, not Suze Orman’s, not your co-workers, and not even your financial advisor’s. Your situation is different than others and you relate uniquely to money.
Sure there are elements that are the same across financial plans such as saving, budgeting, and squashing debt. But how you go about doing those things are generally different for different people. The way you set your goals, the motivation for meeting your goals, and the values that drive your behavior all must be taken into consideration.
If you’ve never taken the time to thoughtfully cast a vision for your future and set some basic action items to start you on the path to bring your vision to life, do it! Even if your initial feelings toward the process and toward your future are bleak, crafting a plan can be freeing and can motivate you to make the necessary changes today that will give you the best chance for success.
Focus on what you can control
A lot of things matter, but there are few things you can control. Focus on what you can control.
If you find yourself concerned about your investments, concerned about your financial future, come back to what you know. You will always have a better chance at success if you focus on what is in your control.
It always helps to get away from it all and go to the beach.