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7 months ago

IN TIMES OF CHANGE, FOCUS ON YOUR FINANCIAL PLAN

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behavior-gap

No one can guarantee when the markets will go up or down. Lots of talking heads and so-called “experts” like to claim they know when factors like news items or current events will impact how the stock market behaves, but it’s all guesswork.

It’s extremely easy to get caught up in a 24/7 news cycle that produces headlines and predictions meant to invoke emotional reactions in viewers. But the key to long-term financial success is tuning out the noise and understanding that ups and downs happen.

We know markets can be volatile. That’s part of the price paid to invest and earn more money than you could almost anywhere else — and it’s also something to account for in a comprehensive financial plan.

The only certain thing is that the market will rise and fall. We don’t know exactly when. All the noise from reporters, TV hosts, or others speculating about what the market will do next because of elections, the Fed, or whatever else they point to as the why behind their guesswork only serves as a negative distraction.

Instead of panicking and reacting based on what you hear on the news or from folks at work, you can create and set a financial plan, tailored specifically to you, based on reasonable, objective decision making (instead of emotional and irrational). A great financial plan accounts for your goals, your risk tolerance, and your concerns — and it means you already know what to do when others threaten that the market may take a turn due to whatever people happen to be worked up over today.

WHAT DOES IT MEAN TO HAVE A COMPREHENSIVE FINANCIAL PLAN?

A comprehensive financial plan is specific to you. It includes factors like:

  • Your goals (saving for a house or a child’s college education, retiring early, starting a business, and so on)
  • Your income
  • Your cash flow
  • Your tax situation
  • Your target retirement date
  • Your future earnings and income
  • Your risk tolerance
  • Your time horizon

Note that each of these components of a financial plan starts with “your.” That’s because a comprehensive financial plans starts with you — not the news, or the global markets, or future predictions.

And of course, a financial plan can include more than just what’s listed here. Again, the theme is you. What’s important to you? That has to be factored in.

While investing is an important part of achieving your long-term goals, focusing solely on investments alone is similar to running around a hamster wheel. There will be highs and lows, but if you aren’t working toward something, you’re just running in circles.

Investing coupled with a comprehensive plan that looks at the big picture ensures you are investing appropriately for your situation and making progress toward your goals.

DON’T PANIC AND REACT WITH EMOTION

One of the most important benefits to having a financial advisor is that they can serve as a gatekeeper to keep you from reacting emotionally and totally derailing your financial plan. When markets tank (like they did in 2008 and 2009), people start to panic.

As they watch the markets fall, they react emotionally. They can’t stomach losing so much money. They freak out! And then they sell at the absolute worst time: when markets are already down!

Keep in mind that after you sell at the bottom, you won’t know when to buy back in — and that often leaves people buying at the top of the market. Selling low and buying high is the opposite of prudent investment advice. Meet the “behavior gap”.

Think of it this way: you wouldn’t go to a store and specifically not buy something because it was on sale. It’s the same way with stocks. When they’re down, they are “on sale.” This is the rational, objective way to look at the market.

But when it’s your money and your net worth you see taking a hit because the market dropped, it’s extremely difficult to maintain that mindset and act rationally. Again, most people panic and never dream of buying because it really hurts to see those red down arrows next to your investment balances.

An objective third party can help you prevent such a huge mistake. A financial planner willing to act as your fiduciary will remind you of your comprehensive financial plan that was already built assuming there would be market volatility.

In short, that means your planner can give you some of the most valuable advice you can ever receive when everyone else is panicking: don’t deviate from your plan! That may mean staying the course and taking advantage of this latest ‘sale’.

THE RIGHT PLAN WILL HOLD STEADY THROUGH CURRENT EVENTS

Ultimately, a comprehensive plan stands the test of time. Because market fluctuations are expected (remember, it’s the timing that’s unexpected), your plan already accounts for them.

Your financial plan tells you what to do even in turbulent markets or troubled and uncertain times. It’s designed for the long-term. What feels like a big, massive upheaval today will likely be a blip on the radar when you look back in 30 years.

The best way to safeguard against panic and emotional reactions is to have a financial plan — and then stick to it.

*Originally published here.

Michael G Rivas CFP® founded Bienvenue Wealth, LLC located in New Orleans, LA to offer fee-only wealth management services to successful business owners, Gen X professionals, and their families.

Contact Michael: mrivas@bienvenuewealth.com   504-585-7355

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7 months ago
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