The financial markets over the past few weeks have highlighted the recent versus relevant. Short term, day to day price changes in the stock market have pushed some investors to question what may happen in the future. Let’s step back and examine what we know, what we don’t know and how to stay focused on your long term future.
One of the main emotional biases that many investors carry around is the “recency bias”. Basically, this describes the tendency to pull forward what is happening short term into the long term. This can create erroneous conclusions which then lead to poor decisions, all based on a small sample of a few days or few weeks.
During the month of August, the S&P 500 declined by about 6%. Globally diversified portfolios fared much better of course. Headlines in the media, however, use phrases like “Worst August in 14 years!” or “Stocks Plunge”. Remember, as we have discussed previously, that the S&P 500 Index declines by an average of 14% during the year at some point (and then goes on to be positive in 27 of the past 35 years). As of this writing, we have not yet reached the average intra year decline but panic-stricken finance journalists scream from the TV all day, every day.
The recent past reminds us of the value of a purposeful financial plan. No one, not even the CNBC or Bloomberg folks, know what will happen tomorrow. Without something to aim for well off into the future, you are left to the media pundits, rarely right but always with opinions. Financial life planning…is more than numbers. Ready for a real conversation?