Market Volatility Shouldn't Rattle a Good Financial Plan
On Feb. 27 this year, the Dow Jones Industrial Average slid 416 points, the biggest drop since the market reopened after the 9/11 attacks. By early May, the market had more than made up those losses and stood at record highs. More recently, soon after hitting 14,000, the DOW was again testing the 13000 level.
How did you react? Did you turn off the news? Did you call your broker in a panic? Or did you call your financial planner to see if your plan was solid?
It’s easy to succumb to the urge to sell if the market takes a header or buy if it’s headed upward. But sudden action is usually a mistake. In the late 1980s, Harvard psychologist Paul Andreassen made news with a research project that found that people who listened to market news actually made lower returns. Why? Because those who sold – or bought – during a market swing probably found a day later that the market was really running on hype, not fundamentals.
You pay a financial planner to design a financial strategy that helps you achieve your ideal goals with comfort and confidence. No, there is absolutely no way to guarantee that you’ll never lose money. But if a plan truly matches you, the noise level on TV shouldn’t make a difference. So the next time the Dow spikes or slides, ask yourself:
What’s my plan? If you’ve worked with a good financial planner, you should be able to articulate those goals all by yourself or refer to an investment policy statement you made together. For instance, much of the riskiest investing, overbuying and panic selling during the late 1990s and early 2000s could have been avoided if individual investors had been more focused on making the most of their one life and less on short-term performance.
Am I diversified? The NASDAQ lost 39 percent of its value just in 2001, and another 21 percent in 2002. Meanwhile, real estate investment trusts, which performed poorly in 1998 and 1999 when stocks were booming, had banner years in 2000 and 2001, performed so-so in 2002, and had an excellent 2003. Bonds also returned well during the bear market. Your planner, based on your risk profile, should have you in diversified investments that fit your goals.
Do I know where I stand? Having a long-term investment plan doesn’t mean make the plan and leave it to gather dust. On the contrary, since you are bombarded with negative news almost every day, it is important to review your plan as frequently as possible. Ideally, you and your planner should measure the progress towards your goals every 90 days. In addition, a thorough audit of your financial plan should be done no less than annually. However, in the event of death, divorce, kids moving out or an illness, a more frequent head-to-toe review of a financial plan may be needed.
To say the least, financial planning is a process – not a transaction. Consequently, a healthy relationship with your financial planner typically involves frequent communication and/or meetings.
Market volatility is a necessary reality if you ever expect to stay above the death waters of taxes and inflation. However, with a sound financial plan and a healthy planning relationship, it does not have to be a source of anxiety. When planning is done right, it doesn’t cost – planning pays!
This column is produced by Richard Van Der Noord in Greenville, SC. Mr. Van Der Noord is a nationally recognized Certified Financial Planner and a local member of the FPA.