I like to say that if my clients are worried when the market does somersaults, then I’m not doing my job. And yet, I know that no matter how much I talk about prudent portfolio risk and why our focus on the long-term mitigates the impact of short-term market fluctuations, it can be a challenge to turn off that voice in your head that starts making noise when the market dips. The nagging questions can persist. How will this affect my income? Should I be making any adjustments? Will I really have enough to retire or take care of myself?
While those questions may always rear their ugly heads when the market is in the red, here are 5 tips to help you stay on top of your emotions—and on track toward financial success:
1. Admit you’re human
In fact, embrace it! Why? As humans, we are never (ever!) free of emotions. That means that the majority of our decisions—as much as 90%—are based on our reactions to events and, yes, our emotions. Which also means that a measly 10% of our decisions are based on technical realities. If you can accept your humanity and realize that emotions play a huge role in everything we do, then you just might be ready to be an investor. (For more on juggling being human with the rollercoaster ride of investing, take a look at my blog Finance and feelings: Navigating life’s twists and turns.)
2. Get clarity about your personal values and goals
Since emotions drive our actions, it’s important to realize that each one of us has “money scripts”—absolute truths that seem to have come from our mother’s milk and that dictate how we think about money. We’re taught to be generous… or thrifty… or that “charity begins at home.” We’re given rules like “tithing is required” or “the children come first” or “children should stand on their own two feet.” We’re told that our “net worth” is our “real worth.” (For more on this topic, see my blog Money Rules.) But in the real world, these learned truths may not be so true after all.
Look carefully at your values and goals, and understand your personal truth. Throw out anything that doesn’t fit your reality. Define your personal values and goals, and then determine how much money you need to support them. Start with how much you need for the basics—food, clothing, shelter, medical—today and in the future, and then decide how you want to use the excess. What’s most important to you? Consider things like funding your grandchildren’s education, traveling, starting a business, supporting a cause, or leaving a family legacy. The options are limitless, and they’re highly individual.
3. Be humble
There’s an Old English proverb that says it well: Enough is as good as a feast. When it comes to investing, your ultimate goal should be simple: save enough to support your goals. Remember, when investing, average is good. If your goal is to beat the market, you’re bound to assume an unwise amount of risk. A more humble approach is to trust the rules of investing, carefully balance risk and return, and set a goal of accumulating enough assets to support your life. You may not experience the “thrill of victory,” but you’re also much less likely to suffer the “agony of defeat.”
4. Get help
Getting the help of an objective third party can help remove the emotion from investing and support smarter, more rational decisions. My clients Doug and Marie used to have terrible arguments about money. They had very different values and goals, and that disconnect created highly emotional conflicts. When we started working together, I asked them each to write down their feelings about money, as well as their values and goals. Now, even if they don’t agree, they at least understand each other’s perspective. And when they do disagree—or their emotions start to override smart financial decision-making—they “just call Lauren.”
5. Stay true to your goals
Judy had been retired for just over five years when the market crashed back in 2008. It was a dramatic time when many investors were letting their emotions dictate their decisions. Pundits posited that the market would never be the same and that staying put would be a sure path to financial ruin. Judy watched friends pull everything they had out of the market and put their assets into “safe” places—short-term CDs, bonds, and even savings accounts. They all said they’d “get back in” when and if the market recovered. Judy knew her plan was sound; she knew her goals, and she stayed invested.
It took a while, but the market recovered. In the past two months, it’s set new record highs, with the Dow jumping past 18,000. As a result, when we reviewed Judy’s portfolio last week, she was thrilled to realize that she has almost the same amount in her account as the day she retired over 12 years ago. That’s the strength of the market. That’s the power of long-term investing.
When you have a solid plan in place that’s designed to support your values and goals, short-term shifts in the market don’t have the power to deliver financial catastrophe. In fact, if you’re still contributing to your savings, market dips will help your long-term outcome by giving you an opportunity to buy more for less. Even when you’re in the distribution phase, we design your portfolio to insulate you from volatility. And if you start to doubt yourself? Go back to step one and remember: you’re human. Then review your values and goals, and trust that you’re on track to have enough to live the life you were meant to live.
[Photo credit: Daniel Ito]