Is the biggest risk to your returns looking back at you in the mirror? Many of us have found that acknowledging our own behavior in certain situations can make our chances of success higher and alleviate stress at the same time. I hate driving in rush hour traffic, so I avoid it when possible. All of us hate waiting in line, but we know the situations and places that will require us to do so. Those of us who can put ourselves in the right mindset to cope with these situations seem to endure less aggravation.
How does this relate to investing? Well, the stock market is subject to volatility and it is likely at some point we will have bear a market, having the right mindset when it arrives is vital to enjoy the benefits of long-term investing. Having a plan in place when the market is going south is integral to success as an investor. The plan may be as simple as choosing to stop paying attention to the market. For some this works, for many others, it’s not that easy.
For many of us knowing what the market is doing is not helpful, in fact it can be detrimental. For some reason, many investors feel that they need to watch the market closely because in the back of their minds it is only logical to “do” something when the market drops. The logical move would be to sell which of course creates the problem of when to buy back in. Most will only buy back in when the market has already recovered. Like a roller coaster, getting off at the bottom of the first big hill can be very dangerous and you were better off just holding on until you reached your destination.
Speaking of a destination – knowing, or at least having, some idea of how and when one plans on using the money are crucial strategic facts. Assets that are to be used 20 years down the road could be invested very differently that money that is needed in say, 5 years. It’s also important to understand how the money is to be used. Is it needed in a lump sum or is it meant to payout an income for a period of time?
Having a plan to reach your financial destination can be a game changer. A plan can force us to keep our eyes on the big picture. Understanding why we deploy various amounts of portfolio risk in different buckets of our assets helps us to maintain a long-term perspective, especially when things get volatile. A well-crafted, thoughtful plan, and a planner you have confidence in may be invaluable.
The next time that investor staring back at you in the mirror has a panicked look, refer them to their financial plan, planner, and portfolio mix they helped create…and turn off the TV!
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources, however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Any tax advice contained herein is of a general nature. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein.
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Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Diversification cannot assure a profit or guarantee against a loss. Indices are unmanaged and do not incur fees. One cannot directly invest in an index.
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