The Dow Jones Industrial Average hit 20,000. The aftermath was a barrage of media stories—some encouraging, others less optimistic. The positive stories prompted investors to buy more equities in expectation of more future gain; the cynics foretold the forthcoming correction with a warning: Get out of stocks. The one common theme all the articles share is that, yes, something is going to happen next. And this something will likely show gains and reverses, followed by more gains and more reverses.
The problem investors have to wrestle with is the “when”, the “how much” and the reasonable amount of risk they can handle based on their life’s circumstances, goals and values. Predicting the markets is a treacherous affair that may bring riches—but if history is any indication, it is more likely to leave your net worth plummeting.
But, we’re only human. We can smell a rally, a hot stock or a winning manager, right? It’s tough being a spectator, sitting on the sidelines while the whisper of riches is more of a shout.
We’re smart; we read the business journals, we watch cable news programs, we buy books and newsletters that may give us a competitive edge over those who miss out on the action. The noise swirling around the markets is like a cat smelling catnip—and rational thought becomes more than merely difficult.
When the urge hits and the image of a soaring market paints images of retirement in Bora Bora, stop and consider the following:
- For every share of stock you buy, someone has decided to sell it.
- Achieving your goals is less probable when your emotions are swayed to make decisions that can easily be regrettable.
- While you might believe you can stand risk; chances are, you may not be able to stand as much as you think.
- There’s more to living a fulfilling life than being plugged into the market from morning ‘til night.
- Any well conceived plan has an alternate “Plan B”. What’s yours?
Unbridled enthusiasm may be a warning sign of unrealistic expectations, risking the safety and security of your financial life. The markets’ history is full of rallies and corrections, new highs and dramatic pull-backs, constant movement and reactions to short-term speculation. There are winners and losers—and the contest is not played on a level field.
Given this information, protect your financial security by avoiding the noise and focusing on strategies that move you closer to your life’s highest values. Your financial security and life’s values are more important than the dream of the bit hit.
- Have a written financial plan that outlines your goals, both long-term and short-term.
- Work with a team of experts who offer guidance and advice. Make sure those experts have your best interest in mind with no conflicts of interest.
- Have adequate reserves allotted for unexpected events.
- Take risk management seriously. Understand where and how your financial security can suffer a significant loss. Think: Death, disability, legal liability, uninsured losses and the impact of sudden, swift and meaningful unforeseen occurrences.
- Monitor and update your plan when something changes that impacts your goals or circumstances.
Financial success doesn’t occur because the Dow hit 20,000 or any market indicator posts new highs. Financial success happens when you tune out the noise and follow your plan.