CHICAGO – I had an uncle whose lifelong financial goal was to raise $1 million to bequeath to his children.
A farmer, he was frugal by nature; in his 70s, he finally achieved his goal. Rather than celebrate his wealth, to be transformed into the poorest, most miserly man I have ever known.
Each purchase – as well as any downturn in the markets – moved back across the goal line into negative territory, making the loss much bigger in his head than it was in his life. The declines had no impact on his ability to live out his days in comfort – they didn’t impact his ability to afford everything he might want or need – but did have an effect massive impact on his mental health and his ability to profit from his financial achievements.
The potential of not achieving his goal made him more tense and anxious about money than ever.
I’ve been thinking about him a lot lately, as the market has had a miserable start to the year.
With stocks falling sharply and bonds losing momentum, I’m afraid many people share my late uncle’s mindset. They see portfolios losing ground, pulling back on important milestones and being scared.
It’s emotional but understandable. Most investors hate losses more than they love gains, but they anchor their minds to the highs, which means that every time they see a new high for their account value, they internalize the line. high water.
Rather than seeing the years of gains and progress that made their holdings a good number, they consider that any drop from a peak leaves them on a bad number.
These profits are made on paper and not set in stone, but that doesn’t reduce the feeling of loss when a portfolio pulls back.
The impact is now compounded by rising prices and high inflation. He associates the feeling of loss with the feeling that things will never be affordable again and that stepping back from a wallet marker can feel like driving at high speed in the wrong direction.
It’s incredibly difficult to fight.
“Telling people to do nothing to meet those conditions—because they had better stay on the course they set for themselves—is unsatisfying when they have anchored themselves at the highest level of balance and don’t want to don’t let go,” says Christine Benz, director of personal finance and retirement planning for Morningstar. “Nothing will really make them feel better until they get back to that peak.”
While falling from a high tends to make a decline seem quick and precipitous, investors should hold back.
I could trot old chestnuts about feeling good about how far we’ve come, but that’s just cold comfort when the stock market enters bearish territory.
Experts at the Morningstar Investment Conference in Chicago last week were quick to offer portfolio solutions on how to invest in this storm, but had nothing to offer other than “hold on” to the tense investors.
That might be good advice, but it’s not helpful when all is not well.
Nervous investors should instead consider a few other factors:
How did you define your goal or target?
Many people are like my uncle. He never did any analysis of his needs – in fact, his goal was to pass on wealth to his children – it was just to reach large numbers.
You don’t save and invest because it gets you to a certain number, you get to a certain number because you saved and invested to have peace of mind that you could live comfortably.
Are losses and setbacks important in your life, or only for your target?
I recently spoke with a young investor who was hoping to amass $50,000 in savings by age 25. He was upset that the market downturn was going to leave him short.
It’s disappointing, but the money he’s saved and invested puts him way ahead of his peers.
Not achieving a goal is much less important than putting in the effort and getting close to it.
If your portfolio remains healthy and on track to meet your long-term goals and needs, where it is now and what it’s done for you lately isn’t that important.
Is this a temporary setback or a real loss?
I am not immune to this thought; the last time i checked my portfolio it had fallen below a round number which is meaningful to me as a goal because that is where i hoped to be when i hit 65.
It’s disappointing, but I don’t reach that stage in my life for five years, so the drop doesn’t prevent me from achieving my major financial planning goals.
The time horizon is important when it comes to your goals. Although a retiree may feel the current conditions more acutely than the young man who likes to save, this does not mean that the situation is dire.
Most people would be quite happy to be confronted with my uncle’s situation. Even short of numbers – which he ultimately didn’t – he would still have been wealthy by most standards and set for life according to his own lifestyle. He had everything he wanted except the number.
Do you really have a different view of your investments?
We are happy when the market gains 15% and miserable when it loses 15%. It’s the same move, but no one complains about volatility when it works in our favor.
If your portfolio wasn’t too volatile or scary on its way to the level you locked in your head as a spike, a downturn shouldn’t scare you.
“Make your decisions based on the market, not emotion,” says Benz. “Focus on what your money can do for you, not on achieving a certain goal. These are not comfortable times, but unless you look at them thinking there has been a shift in thought – that the market is different and has changed forever – don’t let your emotions take over. over on you.