Most of us don’t like to be scared or surprised. However, coming to grips with these innate fears is an important ingredient in a successful investing experience. Regardless of your age, be it 50 or 80, trying to avoid these fears creates a problem in making financial decisions.
Investing is a subset of goals based financial planning. Some individuals focus almost entirely on investing and investments instead of actual long-term goals. This can lead to dis-jointed or “strategy-free” investing. Thankfully, cures exist for this malady.
1. The first cure for being scared or surprised financially is to totally re-frame the objective and thereby transform the fear into fuel for growth.
Particularly for those in their 50’s and 60’s, the scariest thing is the possibility that specific financial goals won’t be achieved. For some, this literally will mean outliving their financial resources. That indeed is scary! Once this long-term objective is put at the forefront, the day-to-day financial market noise is of little importance and the fear of the urgent is suppressed.
2. 2016 has been a living tutorial in how markets behave and why investors should never be surprised about routine volatility.
The first few months of 2016 saw the S&P 500 Index drop by 11%. In early summer, the market declined by 6% in a single day over the Brexit vote. In after hours trading before the market opened on November 10, the Dow was off almost 800 points. The balance of November post election saw the broad market travel to record levels. All of these events connect to the primary lesson of avoiding the siren as a signal . Staying on plan, on the path to your goals is the cure.
3. The third cure for being scared or surprised is to understand what “average” means.
The chart below depicts the “average” annual returns for the broad U.S. stock market for the past nine decades. The “average” annual return is highlighted around 10%. Notice that while that is the “average”, only five years out of 90 reflect an actual return within 2% of that “average”. The cure is to expect returns to be something other than “average” and not to be surprised when that occurs.
Annual vs. Average Returns 1926 - 2015
4. The fourth cure is to understand that the future is always unknown and uncertain.
While predictions abound at this time of year, no one has the ability to predict exactly what will transpire in the financial markets next month or next year. The best way to combat the temptation to act on forecasts is to embrace the components that you can control: broad global diversification, tax efficiency, investment costs; your behavior and your savings rate.
Regardless of the almost endless external events across the globe that are sometimes scary and surprising, history demonstrates clearly how long-term investors are rewarded. Be brave, your financial future demands it.