As I begin this article in the early days of October, 2015, I am well aware of how the markets have performed since June of this year. In fact, I’ve been making a lot of phone calls over the last couple of weeks, speaking with our clients about their goals and how the market changes are impacting their financial standing.
As I spend time with clients, I hear nervousness in people’s voices, and rightly so. The sting of the market declines from 2008 and 2009 are still very real for people. Those kinds of losses are hard to forget.
But this leaves me with a question. How should you respond to recent market volatility? Are there any steps you can and should take and if so, what are they? Here are some key considerations to help you find certainty in an uncertain time.
The four key focus areas
First, I want to validate the feelings of unease. Market downturns create a lot of anxiety for people. This is particularly true for people who feel that their net worth is heavily tied to the stock market. I want to offer an alternative perspective here that might help reduce anxiety.
People tend to focus on the stock market and their investment portfolio because it’s the most visible symbol of their wealth. This is not made any easier by media pundits who constantly churn out dire predictions and arm-chair advice that is not based on your unique goals or a close analysis of your resources. So I encourage you to turn off that news. It’s not applicable to your unique situation and so you should take it as such – news created for the masses, not you.
Here is another important point to consider. Your investments are probably the least controllable element of your overall wealth. There is very little you can do to control how the markets end up on any given day. But there is a great deal you can do to put yourself in the best possible position to most likely achieve your long-term financial goals.
Here are the four areas I recommend to people to focus on in times like these:
- Remember that no one can predict the markets.
- Focus on those things you can control.
- Review your financial situation to see if you should be making any changes.
- Focus on the timeless principles to wealth building.
Let’s explore each of these in greater detail.
No one can predict the markets
Some television and media personalities seem to suggest that they are prescient, able to see the future. Financial prophets have come and gone, but the markets continue to surprise people. Why? Because no one can predict the future. The best we can do is build plans that take into account an array of possible scenarios.
At Whitnell, we build long-term financial plans that are designed to help achieve your personal goals. We readily admit that we cannot predict the markets or the future. In fact, my colleague David Peckenpaugh recently wrote an article on exactly this topic after his family went through a difficult time.
If you want certainty in an uncertain time, remember that no one can predict the future. Not even those people on television.
Focus on those things you can control
The markets are certainly one element of your financial situation that you cannot control. But the most likely predictor of whether or not you achieve your financial goals is not what happens with the markets. It’s you.
You have within your grasp the greatest ability to control your future. All future financial situations, whether yours or mine, are based on a set of probabilities. The financial plans we build are often based on Monte Carlo simulations, which are projections of outcomes given certain inputs and certain scenarios.
There are many things in these scenarios that you can control. You can control how much you spend, how much you invest and how you react to market volatility. Buying high and selling low for instance, which is the hallmark of emotional investors, is a recipe for financial disaster. Focusing on a long-term plan is both prudent and a better pay-off in the end.
If you desire to increase certainty in an uncertain time, focus on those things you can control.
Review your financial situation to see if you should be making any changes
Market volatility is often a good reminder that decisions need to be made and actions need to be taken in a timely manner. We all get busy with work and family. But certain details, left undone, can have irreversible consequences.
So while we typically don’t recommend a lot of transactional activity during market volatility, it is a good idea to review your financial situation to see what has changed since you last spoke with your Whitnell relationship manager. For instance:
- Did a child graduate from high school or college?
- Did a child age-out of your medical insurance plan?
- Did you get married, divorced or remarried?
- Did a child get married?
- Did you change jobs?
- Did you have a child or a grandchild?
- Has your household income increased or decreased substantially since your last review?
- Did you buy real estate?
- Did you receive an inheritance?
All of these changes may have a significant bearing on your financial situation. But they also should stimulate a review of your financial plan to consider which actions should be taken to protect your financial interests.
If you desire to increase certainty in an uncertain time, make sure you communicate changes in your financial situation to your Whitnell relationship manager. Also, make sure you are taking the steps and that the details you are responsible to manage are being addressed.
Focus on the timeless principles to wealth building
But the single most important thing you can do during market volatility is focus on timeless principles of wealth building. These have not changed for centuries. They are not likely to change anytime soon and they are the best advice I can give anyone who is interested in wealth creation:
- Live beneath your means.
- Invest for the long-term based on your unique goals.
- Build a comprehensive financial plan that protects your wealth while it grows.
Do not allow short term market movements to drive your decision making process. Take the long-term perspective and you’ll be in a much better position to realize your long-term goals.
What to do next
I encourage you not to take certain actions, like making significant financial decisions, just because of short term movements in the markets. Making investment decisions based on emotions usually negatively impacts your ability to reach your goals. Take the long-term perspective based on your own personal goals and timelines and you’ll be in a much better position down the road.
The information contained in this article is provided for informational purposes only. No illustration or content in it should be construed as a substitute for informed professional tax, legal, and/or financial advice.