Doing Nothing Is Hard
“A genius is the man who can do the average thing when everyone else around him is losing his mind.”—Napoleon
Investing sounds easy in theory.
(1) design a portfolio based on goals and risk tolerance
(2) set guidelines for when and how changes should be made
(3) then get out of its way
As anyone who has been investing for some time will tell you, it is anything but easy.
One of the most popular ways financial advisors gauge your tolerance for risk is by showing how your current portfolio would have performed during the 2008 Financial Crisis. Then a simple but difficult question is asked – “How would that have made you feel?” I can tell you how you would feel - pretty awful.
A chart can tell you exactly how a big market decline would impact your portfolio – but it cannot tell you how it would feel to come home, look your spouse in the eyes, and wonder if you’ve made a terrible mistake that will jeopardize your family’s future. “Like everything else worthwhile, successful investing demands a price. But its currency is not dollars and cents. It’s volatility, fear, doubt, uncertainty, and regret - all of which are easy to overlook until you’re dealing with them in real time.” – Morgan Housel
For as much work as your financial advisor does planning for retirement, implementing tax strategies, and rebalancing your investments, their greatest responsibility is their response during these critical events. The majority of your investment results will rely on the decisions you make during these infrequent, but nerve-wracking moments in time. One ill-advised decision can make or break a retirement plan.
With that doom and gloom behind us, what are practical ways to set yourself up for success?
(1) Be realistic about your risk tolerance. If you aren’t true to yourself now, reality will call your bluff in the future.
(2) Be okay with giving up some returns so you can sleep well at night. This might mean less in stocks or keeping more cash in an emergency fund than what conventional wisdom would teach.
(3) Use history as a guide but not a blueprint. Don’t use history to make all decisions for you. You are human, take your characteristics and tendencies into account. With that said, allow history to uncover any misconceptions you might have about investing.
(4) Have a plan of action in place. The worst time to make a plan is when it seems like everything is falling apart. Decide on a plan when you can think clearly and rationally. For example, if our investments are down 20%, we will cut spending by 20% and rebalance our investments to buy stocks.
Thank you for reading,
Alex
This blog post is not advice. Please read disclaimers.