Trending
Everything has a price, either explicit or implicit. When you invest in the stock market, the price you pay for the opportunity to obtain long-term premium returns is the reality that the market will decline frequently. That’s part of what author Nick Murray calls “The Package.”
You don’t achieve the above-inflation returns without accepting the price of routine price declines. You can’t have the good, without the bad.
Planning for the Bad
You don’t need to fret about “why” the market declines significantly every few years, you just need to know that historically it does, for a host of different reasons.
Once you fully accept “The Package” of good along with the bad, you are girding yourself against being spooked when markets inevitably decline. At first blush, that may not sound like a big deal, but staying with your long-term investment plan is key to your financial planning success.
Financial planning projections naturally assume reasonable future investment returns, but also should include the reality of declines. By doing this, you’re actually planning for short-term down periods in the market, which allows you to maintain your focus on the longer term. You’re planning yourself out of being surprised.
Surprise and panic are like kryptonite to a successful long-term financial planning strategy.
Ride Out the Bad Waves to See Good Results
The planning part is easy compared to the emotional and behavioral aspects of staying with your plan in all types of market conditions. As I mentioned earlier, everything has a price, and oftentimes the emotional price is the most significant.
Some investors focus solely on the financial price of inevitable market declines, but largely ignore the ever present emotional cost.
Since many investors think about the stock market in terms of averages, that’s also a good place to start looking at declines. On average, the broad market declines about 15% at some point during most years. That’s totally to be expected.
Every four or five years on average, the decline is about twice the annual average, or 30%, with some years even more. Again, no emotional wrangling is needed. Short-term declines are part of the expected price for long-term returns.
Perhaps the most difficult aspect of long-term financial planning is fully accepting the reality of the markets. They can’t be consistently timed and the underlying economy can’t be easily predicted. If you want the premium long-term returns, you have to stay invested and avoid the emotional rollercoaster associated with trying to “outguess” markets. In my experience, the emotional cost will drive you out of the market quicker than the financial cost.
Becoming shockproof to temporary market declines is one of the most valuable characteristics needed for long-term financial success. It’s crucial to remember that you will likely need ongoing nudges and reminders to keep you on track. That’s part of the real value of the financial planning process. Start there. Ready for a real conversation?
Related: Beyond Returns: The Questions That Truly Shape Your Financial Plan