Three Keys to Surviving the Next Correction
As most of us discovered in South Carolina’s historic flood, it is best to prepare for extreme conditions when everything is calm. The same principle applies to how we think about our investments. It is good to become emotionally prepared for market price variability when all is well.
The S&P 500 Index has declined 10% or more 28 times since 1950; 20% or more nine times; and 30% or more five times during this period. The flip-side is that the S&P 500 was valued at about 17 on January 1, 1950, and is at about 2100 now. The intervening years have brought about all types of scares and random events but the upward trend has continued despite all of those headwinds. There are three keys to keeping your cool when markets turn south:
1. First, consider your entire adult life as your investing time horizon.
That is, if you are age 55 for example, your investment life might be another 40 years. Not everyone will live until age 95 or later, but a good percentage will. If you have a 40-year time horizon, you will likely live through many market pullbacks (see above). Nothing to see here.
2. Next, beware of your behavioral blind spots.
We all have them, even if we think we don’t. We sometimes refer to “the three B’s”—blind spots, biases and behavior. Emotions play a major role in all of our financial choices. In times of stress, herding, or following the crowd can be a costly bias. Feelings of fear, panic and remorse can lead you to make poor choices. Relax and remember you are running a marathon, not a sprint. The long- term trends work in your favor...if you don’t get in their way. With a hat-tip to football season, remember that you don’t have to react to the play-by-play commentary. In fact, you don't even have to listen.
3. Finally, focus on your “why", that is, your reason for investing.
Money means different things to everyone. Remember what you are trying to accomplish financially and why you have accepted the inevitable, if unpredictable, risk associated with investing.
Your financial life is not separate from other aspects of your life. Money plays a role in almost everything you do. Even small financial choices are real...treat them that way.
You stand a much better chance of surviving the next correction if your investments reflect your goals...your values. Is your strategy all set?
Most Read IRIS Articles of the Week (February 20-24)
Here’s a look at the Top 11 Most Viewed Articles of the Week on IRIS.xyz, February 20-24, 2017
Click the headline to read the full article.
Becoming cyborgs is the way to go for financial advisers…blending robotics and humans into one organism. You see, I am convinced that robo-advice models will succeed and prosper. — Tony Vidler
With the global economy warming up, but political uncertainty remaining a constant, it’s more important than ever for investors to position their global portfolios to navigate long-term market volatility. That’s where the power of diversification comes in ... — Yazann Romahi
The financial world is noisy and it’s easy to become distracted from your most important long-term goals. One way to cut through the noise is to focus on just the two factors that ultimately determine your approach to everything else in your financial life; namely, Market Risk and Shortfall Risk. — James E. Wilson
It’s important to admit the truth behind our actions in order to rectify past and future mistakes or regrets. Living in denial only perpetuates making decisions that could potentially lead to financial disaster. — Michael Kay
There's one key approach that makes you invaluable to your clients so they want to stay with you for the long-term. You have to genuinely be interested in people. — Paul Kingsman
When you start dating, you usually start off sharing stories. Tales of your childhood, your previous relationships and your college days. Those stories help explain to your partner who you are and how you act. — Mary Beth Storjohann
It runs counter-intuitive to what we have been led to believe business is all about: make more money and everybody wins, surely? Talk about revenue so that everyone knows what’s important. What’s the problem? — Barry Chandler
In the wake of President Donald Trump’s stunning upset victory, however, muni investors were forced to readjust their expectations of fiscal policy going forward. Because Trump had campaigned on deep cuts to corporate and personal income taxes, equities soared while munis sold off, ending a near-record 54 weeks of net inflows. — Frank Holmes
What does it mean to be a customer-centric company? That seems to be the question of the week. It started off with one of our subscribers emailing in the question, followed by two reporters wanting my take on this now-popular phrase for their interviews. — Paul Laughlin
Everywhere I look I see organizations and people investing heavily in new initiatives, transformation, and change programs. And in almost every case the goals will never be met. One of the most crucial causes of the failure? The right questions were never asked at the outset. — Paul Taylor
Why should we think the head of a private equity company could effectively “fix” US Intelligence? It is not apparent that this individual is even remotely qualified to fix the US intelligence apparatus. — Kathleen McBride
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