Financial Planning – Stay the Course

An invested portfolio is never a stagnant one. This may seem like a ridiculous thing to say out loud—of course it isn’t stagnant, we want it to go up! What happens when it goes down? Notice the word choice: I used the word “when” as opposed to “if”. Down is the unfortunate reality of investing. At one point or another, your portfolio will decrease from its current or future level. Don’t worry, this commentary isn’t all doom and gloom. Simply because your portfolio declines from time to time, does not mean it will remain there.

Portfolios may take twists and turns this year. The testament to our portfolio’s health is how we handle the swaying values of our portfolios. We must stay strong and stay the course.

Example:

SPY (the SPDR S&P 500 Exchange Traded Fund) made 13.46% in 2014.

Lets say on January 1, 2014 I purchased $100,000 worth of SPY. On December 31st, 2014, my $100,000 would have become $113,460.

However, over the course of January of 2014, SPY lost 3.52%. Meaning, at the end of January, my investment would only be worth $96,480. In fact, I would not have made my money back until  the end of February, after SPY went up 4.55%.

If I had panicked at the end of January and sold my investment, I would have realized a permanent loss. Yet, if I stayed the course, by the end of the year, I would have increased the value of my portfolio.

Markets go down, but they also rise. When our emotions run wild, we need to remember that our investment plan does not have a definite outcome. Instead, it has a range of outcomes that will ultimately lead us to our goals.

The market’s movements are no different than our paths in life. Many of us have a very clear idea about our current reality. Some of us are planning for retirement, while others have children going to college. Some of us are looking to purchase new homes, while others need income to maintain their lifestyle. We all have different goals and we are aware of our current reality. We may even have a good idea of where we would like to be in 15, 20 or even 30 years from now.

The path between today and the future rarely stays straight. Think back 15 or more years ago and ask yourself if you knew exactly where you would be today. I suspect you can confirm that over the course of your life, your path zigged and zagged more often than expected. Despite all the back and forth, you’ve made it to where you are today. I guarantee there will be a zig for every zag in your future. Your life likely took a lot of course changes  to reach the point at which you are now. You may benefit from future course adjustments that help you meet your goals.

Sometimes the future can look very clear from our current reality, but we need to remember that life happens. Things will distract us. They may even pull us off course. As long as we stay aware of our current reality (where we are) and our desired future (where we would like to be), we can stay the course, headed toward the prize.

If we know the markets and our lives change over time, we can see why it’s so easy to break the course of financial planning and management:

• We make decisions based on emotions instead of our financial plan.
• Budgets are boring, even if success with budgets is rewarding.
• We think we know more than we really do (about the future that is…).
• Sometimes we don’t learn from our mistakes.
• Heck, sometimes we don’t know why we do the things we do!

How can we make it easier to stay the course?

• We have reachable long-term goals to keep ourselves from being frustrated by our short-term missteps.
• We diversify and don’t put all of our eggs in one basket.
• We understand that there is no such a thing as “getting rich quick” (without also “getting poor quick”).
• We accept that there will be potential obstacles we need to overcome.
• We look for support from people we trust when we need it.
• We celebrate our successes, no matter how small.
• We accept and move on from our failures.

The Market

This piece is for educational purposes only. This is not specific advice for your plan, but general advice on how to handle the swings of the market.  

To learn more about Morgen Beck, view her Paladin Registry research report.