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As another year draws to a close, it’s a good time to revisit why you’re investing. You don’t have a plan if you don’t have goals. Without a financial plan, you’re more likely to react to short-term events that can derail your long-term intentions.
A few years ago we worked with a client who came here with 36 different investment accounts spread among numerous funds and custodians. He lacked direction and was constantly reacting emotionally to short-term noise in the markets. We helped him establish long-term goals and then looked at each investment account through the filter of those goals. Many of his investments were working at cross purposes and in conflict with his long-term financial aspirations.
WHY EMOTIONS MATTER
Daniel Kahneman and Amos Tversky’s seminal paper “Choices, Value, and Frames” outlined how many people are risk-averse in the face of gain and risk-seeking in the face of loss. Volatile markets provide you an ample opportunity to react emotionally depending upon the upward or downward trajectory of the market at the time. If markets are going up, you might be open to taking more risk; if markets are declining, the reverse is true. These are emotional short-term based investment decisions. A financial plan created around your long-term goals is the antidote to emotional investing.
Your financial goals create the reason for investing. Depending on your age and stage of life, your primary reason for investing might be to accumulate and grow your assets or perhaps to sustain your lifestyle in retirement. Your primary reason for investing should drive your investment decisions, not what’s happening today in the market.
STAYING FOCUSED ON WHY YOU’RE INVESTING
Your investment time frame usually forms the foundation of why you’re investing. Your ability to take on risk at age 40 is certainly different than it is at age 70. In either instance, you need to balance your desire for growth or income with the market realities. Focus on controlling the things that are in your control like saving and spending.
Think about your investing lifetime as decades instead of days. That will help you change the perspective of why you are investing.
If you find that you need to make changes to your investments, make sure that the changes align with your long-term goals. Assure yourself that any changes are in preparation for something that’s important to you.
Modern technology allows you easy real time access to the markets. This is not necessarily a bad thing, but it certainly can be if you’re constantly looking at how you’re doing today without remembering your “why.” Remain focused on that.
Related: Financial Planning Is More Than Spreadsheet Formulas