The U.S. stock market has seen a pretty good run up over the last several months. The jobs reports have been favorable and your 401(k) statement probably looks quite attractive. Smiles abound and life is good—and you’ve likely stopped avoiding the mail-man’s delivery of your monthly investment statement. In fact, you open the envelop with a high degree of confidence.
Not to throw a cold wet blanket over your aura of dry warmth, but a degree of reality or at least “normality” should be applied with the most amount of unemotional equanimity as possible.
Following are 24 “reality checks” to keep you in line with appropriate expectations so you can plan and envision your financial life in the most educated manner possible.
- Market rallies do not go on forever.
- Well-diversified portfolios contain a variety of asset classes (large/small/foreign/domestic, etc); those without proper diversification will get slammed at some point.
- Markets can change at any moment without notice. After the change, you won’t know the top or the bottom until well after it has occurred, so don’t try and guess either.
- Flat years are normal.
- Down years are normal.
- Recessions are normal.
- Buying a specific stock means someone has decided to sell that same specific stock. Have you ever considered the “why?” Ask yourself: What is that person losing that you’re gaining? What is that person gaining that you’re losing?
- Good planning takes into account good years, fair years, flat years and bad years.
- There is no such thing as a 100% risk-free return. Even a treasury bill, which has been deemed as risk-free, is only risk-free when it comes to principal. If its return doesn’t outpace inflation, it is NOT risk-free.
- Buy low/sell high is far more difficult than it sound when humans get involved and “feelings” are employed.
- There are a huge number of uncontrollable variables that impact market performance (weather, labor, energy, inflation, political climate, perception, litigation, legislation, management changes, etc).
- You cannot “will” a stock to new highs.
- Money needed for a short-term goal should never be invested in the stock market. The risk is simply too great.
- Your risk tolerance tends to move with the markets. If your investments are up, so is your belief of your ability to take the risks. If the markets are in the toilet, you have next to zero risk tolerance. It’s human nature. Proceed accordingly.
- Long-term bonds are risky.
- Just because it’s called fixed income, doesn’t mean you have no risk.
- Deferred annuities are rarely appropriate, except in very specific situations, regardless of what the sales people tell you. The guarantees and features and benefits typically come at a very, very steep price.
- Time seemingly flies during a market rally, and time slows down considerably when markets are trending downward.
- Stock tips are either illegal or just plain nonsense.
- Stock pickers are like sport fishermen, they can’t wait to tell you about the huge fish they caught, but fail to tell you when they catch nothing.
- People don’t talk about money; they show you their trappings, but not their values.
- Money is not a destination; it’s a tool.
- As soon as the markets turn south, someone will be touting gold bullion/coins as the next best investment.
- Buying rental real estate doesn’t provide a fool-proof guaranteed stream of income; regardless of what you’ve heard. Remember, someone just sold that property. Moreover, real estate professionals passed the opportunity to buy it. So what makes you so smart or so lucky? Again, proceed with caution.
Be wary of market euphoria in all stripes. Be wary of beliefs that see only one possible outcome. Remember, there is nothing simple about money, accumulating wealth or navigating financial decisions. It takes a thoughtful mind, a determined attitude, and tons of patience to take advice. Take the time to assess your knowledge and ask for help from appropriate professionals. Most of all, maintain a broad view; change is always upon us.