Trending
When you make financial decisions, it’s important to guard against letting short-term setbacks derail your long-term planning objectives. Initial outcomes matter, but ultimate outcomes matter more.
At the beginning of the COVID pandemic, ‘Big Bang Theory’ producer Dave Goetsch wrote an op-ed for CNBC online that detailed how having a long-term investment philosophy was helping him weather the scary markets. You surely remember that the broad stock market declined by more than one-third in just a few weeks during Feb-March 2020. Goetsch said, “Be a long-term investor, in markets and in life.” That proved to be timely advice.
If you started your investing journey at the beginning of 2020, you likely were panicked by late February as the stock market appeared to be in a free fall. However, the broad market quickly recovered producing an 18.4% gain for 2020 and a 28.7% gain in 2021. The initial outcome differed substantially from the ultimate outcome.
Shifting your focus to ultimate outcomes instead of the short-term allows you to be less emotional and more sensible.
Begin with the evidence: Stock market history provides a convincing story if you look at the long-term evidence. There are almost 100 years of data that points the way for investors. The problem is, you have to separate speculation from actual investing. Speculation relies on predicting the future which is nearly impossible. Investing relies on market science.
Embrace uncertainty: Uncertainty is baked into the investing cake. It’s a crucial ingredient. Without uncertainty, you don’t get returns. You can’t simply wait for things to settle down and be “more certain.” In life, there are always ranges of possibilities that you have to accept. Quality decisions will sometimes produce good outcomes, but sometimes they don’t. The ultimate outcomes are dependent on many factors that you don’t control.
Optimism is the only realism: We have this quote from Nick Murray in our conference room because without optimism nothing else matters. If you trust that markets work, you necessarily become more optimistic about the future.
Start from today, invest for tomorrow: The primary purpose of financial planning is to prepare for an expected need some time in the future. You start planning today, but the need for the money is later. You will always have some anxiety about the amount of future wealth needed and the assumptions you’ve made about your future consumption.
Behavioral finance research shows that your initial investment experiences, either good or bad, tend to frame your expectations for the future. These expectations might be totally false in the long term. Most investors are hardwired to identify patterns and trends, even when these patterns really don’t exist.
It’s natural to be disappointed sometimes with short-term setbacks, but don’t let this change your philosophy about the long-term. Focus on the quality of your decisions and let your financial plan be your guide.