What if every quarter you received a statement from your mortgage company that not only showed you what you still owed on your house, but also listed exactly what your house was worth and whether it had gone up or down in value since the last quarter? Would you be more inclined to want to sell your house if the value went down or didn't increase the same amount as the principal you paid, even if you had no intention of moving? What if your house was worth less than what you paid for it, even a couple years after you’d purchased?
Would you panic and list your house for sale, thinking that you need to get out before you lose any more of your equity? Of course not, you still need a place to live! But that’s exactly what happens each time you open that app or log in to your retirement account to check on the performance of your account that day or week, even if you’re years away from actually needing that money to fund retirement. It’s what leads to people move their money to cash when the market takes a plunge, then wait too long to get back in – they chase performance rather than invest according to the fundamentals.
Since most people buy homes as long-term investments, they typically don’t pay attention to the prices of the homes selling around them during the years they’re busy living in the home and paying it off. The same attitude really should apply to your retirement savings, even if you’ve already reached the point of beginning to spend them down (we’ll get to why in a moment). When you see your investments fluctuate in value, it's easy to panic and think "I chose wrong" or "I can't afford to lose that money" and switch out. Unfortunately, that behavior tends to do much more damage than good to your savings.
The one thing you can do to ease your stock market jitters during times of market instability is this: don’t look at your account. Resist the urge to take a look, especially when you hear that the market had a rough day.
Of course, we assume here that your investments are set according to the fundamentals of time horizon and risk tolerance, which is one way we help our clients at The Prosperity People. But then once those are set, you can safely ignore the day-to-day happenings inside your investment accounts.
It’s a key reason that our Prosper for Individuals process is focused so heavily on YOUR goals and not on market prognostications or performance. Our portfolios are designed to weather market volatility and our planning process helps you to ensure that the money you DO need to fund your daily life, if you’re already in retirement, is not subjected to the whims of Wall Street.
But even when we tell you that and Andy reminds you of your big picture plan, we know that things can feel scary. We also know that you’re probably going to look at your accounts, even when you know it’s probably only going to make you unnecessarily emotional about the happenings in the market.
A review of the investing fundamentals, therefore, is in line to further help you understand how and why we set our investment models the way we do, according to your goals and not based on what someone’s Magic 8 Ball might be predicting about short-term market performance. (we’re using sarcasm here - we hope no one on Wall Street is using a Magic 8 Ball, but our point is that we are focused less on the short-term movements of the market and more on data-backed fundamentals designed for long-term growth and stability)
Here’s how the fundamentals work.
Time Horizon
Just like it’s pretty risky to buy a home if you’re only planning to stay a few years, money that you expect to need within five years or less really shouldn’t be invested in the stock market unless you can afford to push your timeline back anyway. We know that generally speaking, you’re highly likely to see growth in your investments (and your home’s value) over ten-plus years, so anyone with ten years or more to go has the time to ride out the market plunges in order to take advantage of the market peaks.
The next time the market is down, just think of it the same way you might stock up on non-perishable pantry staples when they’re on sale – each contribution to your 401k or each dividend that’s reinvested is simply buying more shares on sale for future growth.
This investing rule of thumb is a key reason that having an accurate estimate of your cash flow needs in retirement is so essential – so that we can help make sure that money you will need in the next couple years or so isn’t in the market, which can help insulate against the need to sell investments during a down market, unless that’s part of the plan with rebalancing.
Risk Tolerance
Knowing your risk tolerance and then choosing your allocation between stocks and bonds accordingly is the key to getting where you need to go while also being able to sleep at night. Just remember that if you’re too conservative, you’ll have to save more and probably save longer to have the same ending balance as a more aggressive investor. And if you go too aggressive with a shorter timeline in an effort to get to a higher balance faster, you’re subjecting yourself to the risk of having to sell during a down market, which is why the time horizon is such a critical part of your investment plan.
The bottom line is this: unless you're within 5-7 years of beginning withdrawals from your retirement accounts, (in which case you’ll want to make sure you’re starting to create a cash “bucket” for future withdrawals,) save your sanity by thinking of your investments the same way most of us think of our home – as something that we'll keep paying toward, knowing that over the long term, its value should increase, but not worrying so much about the ups and downs in between since we're not planning to sell for years anyway.
Shameless plug: for help with creating an investing plan that’s focused on your goals, reach out to schedule a chat with us today! Our focus is on helping you to prosper and thrive, regardless of current stock market conditions.