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As most of us discovered in South Carolina’s historic flood, it is best to prepare for extreme conditions when everything is calm. The same principle applies to how we think about our investments. It is good to become emotionally prepared for market price variability when all is well.
The S&P 500 Index has declined 10% or more 28 times since 1950; 20% or more nine times; and 30% or more five times during this period. The flip-side is that the S&P 500 was valued at about 17 on January 1, 1950, and is at about 2100 now. The intervening years have brought about all types of scares and random events but the upward trend has continued despite all of those headwinds. There are three keys to keeping your cool when markets turn south:
1. First, consider your entire adult life as your investing time horizon.
That is, if you are age 55 for example, your investment life might be another 40 years. Not everyone will live until age 95 or later, but a good percentage will. If you have a 40-year time horizon, you will likely live through many market pullbacks (see above). Nothing to see here.
2. Next, beware of your behavioral blind spots.
We all have them, even if we think we don’t. We sometimes refer to “the three B’s”—blind spots, biases and behavior. Emotions play a major role in all of our financial choices. In times of stress, herding, or following the crowd can be a costly bias. Feelings of fear, panic and remorse can lead you to make poor choices. Relax and remember you are running a marathon, not a sprint. The long- term trends work in your favor...if you don’t get in their way. With a hat-tip to football season, remember that you don’t have to react to the play-by-play commentary. In fact, you don't even have to listen.
3. Finally, focus on your “why", that is, your reason for investing.
Money means different things to everyone. Remember what you are trying to accomplish financially and why you have accepted the inevitable, if unpredictable, risk associated with investing.
Your financial life is not separate from other aspects of your life. Money plays a role in almost everything you do. Even small financial choices are real...treat them that way.
You stand a much better chance of surviving the next correction if your investments reflect your goals...your values. Is your strategy all set?