Do you get paranoid about your finances, try too hard and end up hurting your chances for a comfortable life?
Sara was sick, or at least so we thought. During one morning, she was having trouble breathing and sneezing, and getting very frustrated. The caring dad yelled at whoever came his way, pushed everyone aside and rushed her to a walk-in clinic. When they got there, Sara was quietly asleep, without a hint of trouble. But that’s not the end of it. Everyone else there was sick. Kids were running around sneezing, coughing, and spreading their viruses around the room. That’s when it dawned on daddy.
Is Sara fine all along but made sick because I came?
Then another thought came to his mind. Has anyone else done this with their finances? Panic, overreact and then swiftly push their finances down the slope of destruction because they just felt they needed to break a sweat?
At the beginning of 2009, when we were still scared out of our minds about the economy, financial system and our retirement, how many of us really did what we were supposed to and stay the course (or better yet, put more into our investments)?
Before you jump up and claim victory because YOU did. How old were you and how much value did your portfolio drop from the peak in 2007? Staying the course after a 50% net worth drop when you are 55 takes a vastly different mental toughness than doing the same when you are 22. If your early retirement hopes were destroyed and you are worried about your future, how much faith can you put into the “everything is just a cycle” theory?
Ignoring the short term was hard, but it’s precisely what we needed to do then. I’m not talking about those who bought Citigroup stock when it was $1, because the majority of those people just made a bet and won. I’m talking about the ones who, despite fear, trusted their experience and knowledge and just stayed heavily invested in diversified investments. The question really is, how do we get there?
Truthfully, there really is no right way to go about this, but at least I know these will help.
- Been Through it Before. The more bear markets you go through in your life, the more you understand how the whole system works. While there is no magical way of gaining experience, you can help yourself by slowly increasing your risk exposure within the same asset class as you age. This is counter intuitive, but what I mean is, start off your exposure to equity investing with index funds. Then, as you feel more comfortable with the up and downs, then move onto perhaps different types of ETFs, and finally into stocks (if you so inclined). It’s much easier to feel safe in an index fund than putting your faith in one particular company, and having the needed experience may just make the difference of selling low or selling high.
- Have a Plan. You seldom hear about people being proactive with their investments, but having a plan really helps. Investing has nothing to do with disaster recovery, but simulating a disaster recovery plan will increase the chances that you don’t panic at the worst possible moment.
- Don’t Sweat It. Chances are good that you are underestimating your investment horizon. If you are retiring in 5 years, you need to account for the fact that the majority of your funds will still be invested for the next 25 years. In the long run, stocks win. Stay the course, and you will come out okay.
In the end, the doctor said Sara was fine, and for daddy not to worry. “Whew” he thought. I will be ready during the next crisis.