This Week is Exactly Why You Need a Long Term Plan
Handling market volatility ahead of time
You may have noticed that the stock market did a little something this week. I don’t know how you could’ve missed it. Every news site, TV channel, and social media feed filled with end-times type headlines. (Seriously, I think headline writers must get paid by the ridiculousness of their alliteration).
“Market forecasters will fill your ear
but will never fill your wallet.”
~Warren Buffett
But here’s the big question: what should you do about it?
Most people probably shouldn’t do anything, other than stop clicking on those headlines. However, if you really weren’t sure how (or if) the rollercoaster of the market affected you this week, now is probably a great time to take stock in your own long-term financial plan.
It might surprise you that we didn’t have a crowd of clients reaching out to us this week needing for us to talk them down off the ledge. This is because most of them have worked hard with us to create a long-term plan for their financial life (one of our core principles). So they had already discussed what to do (or not do) when something like this happens.
What about you? Could you write your plan down on a single sheet of paper today?
Here are three questions you can ask to see if your long-term plan is a good one:
1. Does your plan anticipate both the ups and downs?
Market downturns should not surprise anyone. No one can tell you when they’re going to happen, of course, but they’ve been a consistent part of investing. Even though equities have a long-term trend of consistent growth, they have never taken a straight path to get there.
Even bull markets have regular corrections. Do you remember the major “correction” of 2011? Or the other dozen minor ones that have happened in the last five years? Probably not.
So does your plan tell you what to do if the market drops 20%? 40%? (“Nothing”? “Take advantage of a sale price and buy”?) If it doesn’t tell you what to do, then you will be more likely to react emotionally and make a misstep at the worst possible time.
Your best friends for long-term investing planning will be:
• Regular rebalancing to systematically sell high & buy low.
• Diversification of what you own, sectors and asset types to spread risk.
• Dollar-cost averaging to automatically buy at better prices.
2. Does your plan translate long-term direction into short-term actions?
I have long-term running goals. But when I want to run a half-marathon, I don’t just wake up that morning, get up, and go run the race. I think about a strategy months in advance. And then I take that strategy and break it down into weekly objectives that will help me grow my running endurance and speed until I can hit the race goal I’m shooting for.
A lot of people’s long-term financial plans are very specific about where they want to be in the future (“playing golf in Florida”), but they have no idea what to do today to get there. They haven’t run the numbers or translated those numbers into monthly saving goals. Putting your head in the sand is not a sound strategy.
One way or another, your race is coming up. Are you preparing now?
3. Is your plan as automatic as possible?
It’s not enough to know what the right steps are; you actually have to take them. We’ve found that the best way to make sure they get done is to remove the weakest link: you. Find the steps most critical to making your plan work and get them to happen regularly without you.
What needs to be automated will be different depending on your goals. But it could mean:
• Automatic savings with each paycheck
• Auto-bill pay
• Automatic expense tracking
• Automatic investing in a company 401(k) or your IRA (see dollar-cost averaging, above)
• Regular and consistent meetings with your financial advisor to get stuff done
The best news may be that you don’t need to do any of this alone. It’s possible that the hype can be overwhelming and the tasks facing you may be daunting. But cutting through all this junk is exactly why I (and others) have become financial advisors in the first place: to help people make and fulfill their plans. So if you’re having trouble figuring it out on your own, reach out for some help.
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