Much of our financial planning advice is focused on helping clients avoid serious financial missteps. Research in behavioral finance has demonstrated that humans are not wired to handle the short-term vagaries of investment markets. This creates tension between our head and our heart, our intellect and emotions.
Armed with knowledge of the human condition, what are you to do? I think a good place to begin is to understand what to expect from investments right from the start.
- You absolutely will experience some short-term losses in your investment portfolios. Wow! That sounds bad…and it is only if you turn short-term losses into permanent long-term losses by selling in a panic. Don’t do that!
- You will experience long timeframes where certain parts of your diversified portfolio perform poorly relative to some particular index. Expect this and appreciate this. There are a dozen or more distinct asset classes and each has different risk factors and return expectations. Comparing small international value stocks to large U.S. growth stocks is meaningless …and potentially dangerous.
- You will wake up one day and declare, “my portfolio strategy is broken”. I would have been so much better off if I had invested in __________ instead of __________. This is directly related to # 2 above. Expect different components of your portfolio to perform differently over given years. What matters in investing is the long-term (investing lifetime) since you are investing for something in the future.
- There are no guarantees…no way to eliminate uncertainty and risk. Expect uncertainty.
If you frame your expectations using these four guidelines, you won’t be surprised. That helps tamp down the emotional response so common in investing. Ready for a real conversation?