“Stick with the plan” is investment advice, financial strategy and part of the actual plan.
That doesn’t make it easy or comfortable.
With volatility up and the market down over 5 percent in January, and with higher inflation, rising interest rates, a global supply-chain crisis, international unrest, worldwide politics and more swirling around us, the idea of “staying the course” feels more like something you reluctantly agree to do rather than eagerly pursue.
Darrell in Lynnwood, Wash., got that advice last week from his financial adviser. He’s in his mid-50s, an office administrator who is on pace to retire in a decade having reached his savings goals provided the market doesn’t stomp on those dreams.
Nervous about just how much his hopes and dreams depend on avoiding a market wipeout that “would force me to work into my 70s,” Darrell wanted more concrete reasons to stay the course now.
He’s far from alone.
“Keep calm and carry on” may be the right thing for experts to say, but it is every bit as hollow as the horrific “This is no time for panic” mantra you get from the financial talking heads every time the market seems poised for a meltdown.
The latter is bad because it implies that there might be a good time to panic.
The stand-firm idea is troubling because the people requiring that advice – including Darrell — have already lost their sense of calm.
“How can you convince me to stick with the plan,” Darrell asked.
Here are a few ideas that I hope can help steel your spine no matter the headlines and volatility we live through next:
Look at the chances. There have been studies done looking at the daily returns of the stock market dating back about 100 years, to before the Great Depression, and they show that the odds of making money in the stock market outweigh the chances that you don’t.
Mind you, on any given day, there’s a pretty good chance that you will lose money. It’s almost a coin flip; historically, losses happen about 45 percent of days. The chances of loss don’t decline much if you were to invest for a week.
But if you were to invest for a decade, historically speaking the chances are roughly seven-in-eight that you will make money. And it’s important to note that those historic results are based on price returns only; add dividends into the mix and the total returns go up, making the odds of long-term loss very small.
This is why you don’t let some bad days become a reason to abandon a long-term plan.
Review and update the plan. A good financial plan is more about building emotional discipline — the ability to set a course and follow it – than it is about picking investments.
It should be built to last a lifetime and annual reviews should measure progress and, yes, in an ideal world it can be set and followed forever.
But life is what happens when you are making other plans, and there is little question that what has happened/is happening in your life could be affecting how comfortable you are sticking with the program.
David Snowball, founder of MutualFundObserver.com once told me that there are three sorts of reasons why investors adjust their portfolio: “Strategic, structural and stupid.”
Structure has to do with the specific investment you are buying and whether something has changed there; stupid reasons revolve around emotion and flawed thinking.
The strategic reasons to make a change typically revolve around life circumstances. If you have lost a job or things get iffy at work, if your child’s first tuition payment is imminent, if you retire or you win the lottery or inherit a pile of money, if you change financial goals because there are grandchildren, life events need to be factored into your plan.
Until you review life changes as they relate to your finances and make appropriate structural adjustments so that the plan you are following is a reflection of your hopes and dreams now, you can’t have complete confidence needed to remain calm and carry on.
Check that you actually are following the plan. If there is something besides the daily market action that is making you nervous, it may be that something feels off.
Rebalance your investments so that they are in line with the program. If you set up a 60-40 stocks-to-bonds portfolio 15 years ago and just let things ride, your asset allocation is likely closer to 80 percent stocks by now, simply because market returns have been so much greater than bond results.
Selling your winners to invest in your laggards is tough, but if you got to the end of January wishing you had pulled some of your winnings off the table, a rebalance might have saved you some angst. It may be less necessary now that the market is down a bit, but make the effort to get back on plan precisely because you want to follow the path you laid out rather than the one the market takes you on.
Remember that days are long but years are short. It’s hard to look at a portfolio experiencing repetitive daily beatdowns.
Those daily moves on your lifetime savings can look big in dollar terms; a red note showing the loss of a few thousand bucks feels significant, even if it’s just an ordinary day in the market.
The media always has another headline, the market has another story, and investors have short memories of both. Unless this is the first time you have ever been nervous about your investments – and if you’re honest, you know that it isn’t – you know that current market events will quickly pass into the morass of other times when market news made you nervous but didn’t derail you.
What happens on the market day-by-day is not important unless you make it so. You’d do that by making changes at the wrong times.
In short, don’t just do something, sit there.
Chuck Jaffe is a nationally syndicated financial columnist and the host of “Money Life with Chuck Jaffe.” You can reach him at firstname.lastname@example.org and tune in at moneylifeshow.com.
Copyright, 2022, J Features