Photo credit: jb
All around us, every day, we see signs of an unstable financial world. The stock market has been all over the place, instability continues in the Middle East (like it will ever change?); at home we’re confronted by a presidential election that offers little choice other than to hold your nose and vote for the one that you believe is likely to do the least damage. Add to this the rising cost of “getting by” and there’s little wonder many folks are very concerned and have little confidence about the future.
What Can You Do?
I don’t suggest hiding under your bed – this has never worked for me, and sometimes you find things there that you would rather not! On the other hand, there are few things that you can do to help get through this uncertainty, and maybe you’ll decide that it’s not so scary after all.
For starters, all of the headlines we see, especially the financial ones, must be taken with a grain of salt. For example, back in early 2001, CNN reported that seven cows, born and raised in Germany, had been diagnosed with mad cow disease. Within six weeks, beef consumption in Germany dropped in half. Yet, throughout the 30+ years since mad cow disease was discovered, a total of 150 deaths have been attributed to this disease. On the other hand, we are told that salmonella poisoning kills more than 600 people in the US every year, along with making an additional 1.4 million of us sick. But the popularity of chicken, the primary food source that hosts salmonella poisoning, continues to increase.
This odd behavior comes about because of how we perceive and interpret information. Obviously, our personal experiences have the greatest weight, followed by experiences related to us by friends and family. The next most believable source of information is mass media, including the largely undocumented internet, while last in line is documented, statistical evidence. So, while most folks have had enough experience with food poisoning to put the salmonella statistics in their proper context, Mad Cow disease, with its sensational name and (at the time) largely unknown characteristics, made us sit up and take notice. And, more importantly from the perspective of the media provider, the sensational SELLS!
So What Does This Mean For My Finances?
Consider how this phenomena impacts your financial confidence. For several years, the watch-word has been to stay out of medium- and long-term bonds as investments, because the long-term rates are going up. This talk began in 2009 – and just lately short-term rates went up a bit, but not enough to make an appreciable difference in using medium- and long-term bonds in your portfolio.
This is not to say that you should ignore the news – but rather, you should keep your trusty grain of salt handy as you do follow the news. And ask your trusted advisor to help you interpret the news that you find particularly troubling. In addition, it doesn’t add value to check your portfolio’s value every day and wring your hands over every headline in the various financial news outlets. Generally speaking, these headlines provide no value to the average investor, and more often than not they serve to distract you from the aim of your long-term plans.
Understand Why You Choose Investments
One of the more difficult things for most folks to understand is that it is near impossible to always choose a “big winner” mutual fund. Consider this: if, over the past five years, a mutual fund manager has had a better-than-average result from his mutual fund (meaning, he’s beating the indexes over that period), he’s one of approximately 3% of all mutual fund managers. When you consider that new funds are introduced every year, replacing old “losers”, you begin to realize that this 3% is actually a smaller number, since the losing funds have disappeared from the list (this is known as survivor bias – meaning those funds that survive look better because the losers have dropped out of sight).
Add to this mix the fact that “past performance doesn’t guarantee future results”. In other words, just because a particular fund manager has beaten the average in the past doesn’t mean that he will do so in the future. What I’m driving at is this: There is no point in chasing the “best” managed mutual fund, especially when the index is likely to beat or equal any given manager 97% of the time, at a cost of far less than half (in terms of internal expense ratios). Our experience shows that you can find a broad-index portfolio for literally pennies versus the dollar many funds change for internal expenses. You’re much better off spending time making sure that your portfolio is well diversified and matches your risk tolerance, and then maintaining solid discipline to not run for the exits when a headline looks scary to you.
Have a Trusted Advisor to Lean On
This goes for all facets of your life, obviously – and of course it’s a bit self-serving when coming from me. The point is, while it’s human nature to believe we can “do it on our own”, we eventually come to realize that we need some additional expertise to help us plan. And once we’ve made those plans, having someone to help us review and consider options is a must – because simply having a plan isn’t enough, we must execute and review results. Once we’ve seen those results, we can then determine how to make minor adjustments for the future, and then again, execute the plans. Especially when the environment has been volatile, it’s important to review our results and make sure we’re still on track.
You might think that the work a financial planner does is based primarily in the future, but the present is at least as important – especially when things haven’t gone the way we’d hoped. In other words, while we’re aiming for a particular goal in the future, it is where we are “today” that gives us our starting point. Confucius said “A journey of a thousand miles begins with a single step”. But if you never stopped during that thousand miles to consider where your destination is relative to where you are right now, you’d likely end up somewhere else.
The Point of All This (FINALLY!)
I know I’ve rambled a bit, but I think you get the gist of my message – Lay out careful plans, don’t allow the “pundits” and headlines to distract you, use the market averages to your advantage, diversify to match your risk tolerance, and check your progress regularly. The author Michael Pollan presented a seven-word mantra in his best-selling book “In Defense of Food” that provides clarity when making choices there:
“Eat food. Not too much. Mostly plants.”
From this idea, I’ve built the following mantra for confidence in investing and planning:
“Plan ahead. Don’t be distracted. Save lots.”
I hope this will help you as you go forward in your financial life. In these uncertain times, having a sound foundation to guide you is your most important tool.