The most difficult aspect of investing is fighting our emotional response to information on a daily basis. Negative numbers reported on our TV screens, a golfing buddy who tells us he got out just before the market began falling in 2007, and announcements from Federal Reserve Chairman Ben Bernanke all create various levels of stress that make us feel we must take action.
In the weeks leading up to the recent market turbulence, I had frequent conversations with clients who were no longer comfortable with their allocation in bonds. The 137% rise in the Dow Jones Industrial average from its March 2009 low of 6,547 caused a different type of stress, but it still made people feel like they needed to do something.
After 25 years of helping individuals and families plan for their financial futures, I believe the ability to recognize our own emotional triggers is one of the biggest factors in our financial success. If we take a deep breath, and remember the markets are nothing more than the collective behavior of millions of other individuals who have their own emotional triggers, we can avoid buying more stocks at market peaks, and selling out when everyone else is panicking.
In our May client letter, Chip Workman compared the inevitable bumps in the market that would accompany the Federal Reserve’s winding down of their bond-buying program to teaching his daughter to ride a bike. The economy is showing strength and it’s time to allow it to remove its training wheels too, but it’s unlikely to be a smooth transition as the last week or so in the market have confirmed.
It’s impossible to remove all stress from investing, because even low-risk investments like CDs create stresses of their own – Will they generate enough return for you to maintain your lifestyle? How will you keep up with inflation, etc.? But a financial plan that maps out what you want to accomplish, and as a result, how you need to invest, can keep you focused. It provides you with something to hold onto when your emotions are pulling you in a different direction.
The last ten years have not been easy for investors. But our clients planning for retirement were able to use drops in the market to rebalance their portfolios and purchase stocks at great discounts from where they are today. Clients already living off their savings had five or more years of withdrawals in their bond and money market funds, allowing them to weather the market drops without being forced to sell their stocks at low prices.
Having a plan in place and recognizing the emotional triggers that may cause us to abandon our plan is the best formula for stress free investing and overall financial success. If the recent turmoil is causing you stress, let’s look at your plan.