Don’t Let Fear Dictate Your Financial Plan
“The only thing to fear is fear itself.” These words, spoken by US President Franklin D. Roosevelt, were the keynote phrase in his first inaugural address. The year was 1933, and the US was in the midst of the Great Depression. While Roosevelt was talking about a national crisis, I think the same words are appropriate for personal lives as well, including (and especially) financial planning.
With the recent volatility in the financial markets, I have received many calls from panicking clients. They ask “What do you think will happen?” And I give them a truthful but unsatisfactory answer. “I don’t know.”
Doing nothing is often the right choice
The next question is often “What should I do?” My answer is usually “Nothing.” That’s right. Nothing. Acting while you are in panic mode is usually a recipe for disaster. You make rash decisions that are not based on reason, but on fear. A good financial plan is based on your goals. While a financial plan is fluid, market gyrations should have little impact, apart perhaps from some minor adjustments. In fact, doing “something” can be damaging to your financial health.
For example, a client of mine became frightened when volatility began to increase a few months ago. After a loss of less than 1% in a single month, he said that he was going to pull all his money from the financial markets and put them into CDs. Given the low yields currently attainable, this would have been an irrational move, made purely out of panic. I presented the logical arguments: the long-term returns on stocks and bonds and the likelihood that interest rates and inflation would eventually rise, both of which would likely make the CDs a very poor investment. Once I explained it to him in those terms, he understood.
You’ve got to be in it to win it
Unfortunately, too many people let their fears decide, and as a result they often do severe damage to their financial health. I wonder how many of you pulled all of your money from stocks following the market crash in 2008. This unfortunately is an all too common knee-jerk reaction. Those that exited the market after incurring heavy losses have missed out on one of the strongest and longest bull markets in history.
Which is riskier: Cash or stocks?
Many people think that cash is safe and stocks are risky. The data shows that they are wrong. The far riskier asset is cash. Don’t take my word for it. Ask Warren Buffett, perhaps the greatest investor of all time. He explains that people confuse volatility with risk. If you look at the data rationally, Buffett explains that in the 50 year period from 1964 to 2014, the S&P 500 rose 11,196%, including reinvested dividends. During the same period, the value of the dollar declined by 87%. Do you still think that stocks are riskier than cash?
Adjust your investments according to your needs
Does this mean that you should put all your money into stocks? The answer is no. Stocks may be best for the long-term, but if you have short-term needs then you should allocate your assets to less-volatile investments, such as cash. If you expect one of your children will get married within the next year or two, then market volatility may drive stocks down just when you need the money. On the other hand, if you are 50 years old and expect to be working another 15-20 years, then you should consider putting all of your retirement funds into stocks, and lowering your exposure as you get closer to retirement.
While logic clearly wins the argument, many people still have trouble overcoming their fears. A reputable financial planner can walk you through the process of proper asset allocation that will meet your needs for years to come.
The above information is not intended to be, and does not constitute, financial or any other advice. It is general in nature and not specific to you. Before using this information to make an investment decision, you should seek the advice of a qualified investment advisor and undertake your own due diligence.