I don’t know about you, but with the news of bank failures in the past few weeks I’m ready for ‘boring’ again. And this reminds me of a truth about your investment plan: it should put you to sleep! As we’ve written about in the past, the best investment plan is diversified and designed around your situation in which you are controlling the controllables. Sound boring? Good. But on the off chance that your eyelids aren’t drooping, here are a few ideas for how you might modify things.
An investment plan should be about your life. It shouldn’t be reactive to what’s happening in the markets or the world.
If your investment strategy is one that is widely diversified and mainly consists of owning funds that track the stock and bond markets, there’s no need to pay attention to how individual companies may be performing or underperforming. You also don’t need to worry about geopolitical events impacting the market performance of a particular day, month or year. The best investment results happen over many years (>5 years) and so keep that timeframe in mind when you’re building an investment strategy for your own situation.
Investing should be about your timeline, not about timing the markets.
When you let go of the notion that you need to time the market (i.e. know when it will have a good year or not), investing suddenly becomes a lot less interesting. For whatever reason (mainly because they get paid to do it), there is a whole group of traders and commentators that try to predict what will happen. It’s a losing game. But if you’re really interested, I’d encourage you to look at some of the forecasts put out by the big banks and market prognosticators. A heads up: they never get it right consistently.
We know that in any individual year, market performance is a coin toss. When we need money in the short-term (>5 years), then we should align our strategy to that goal – i.e. not investing in stocks where the return is unpredictable. When you’re saving for your future life, your time horizon is longer (10+ years) and you can have a lot of confidence in how your portfolio will perform. Remember, over every rolling 20 year time horizon in history, the US stock market has never declined. Meaning you’ll always make money when investing over 20 years.
Inaction is often the best action.
Almost always, the best action is no action when it comes to your plan. But it’s really difficult to just sit on your hands when you see what’s going on in the world. Clients are rightfully worried about how their financial situation will change if, for example, a certain politician is elected. Or when the largest bank failure in 15 years happens. Or if we have a nuclear war (which, in that case, money will be the least of our concerns).
Clients will ask me if we should be doing something different or investing in a different way. And almost always my answer is, “Nope.” It’s not to diminish the gravity of the situations we find ourselves in, but rather give a measured response that is supported by financial facts of the past 150 years. Humanity has witnessed some terrible tragedies in our world, but none of those situations had a long-term impact on the market. I also find it helpful to act like an optimist when investing. That doesn’t mean making foolish investment choices, but rather having a reasonable appreciation for the resilience of humanity.
The big idea here is that boring is good. That may not be true in other areas of your life, but it is certainly an idea to cling to when you are investing your hard earned savings.
Jim is a financial advisor and owner of Thinking Big Financial, Inc. Thinking Big Financial is a fee-only registered investment advisor offering financial planning and investment management services. Specializing in working with the LGBTQ Community.
Please read my legal disclaimer here.