Know Your Financial Personality - Terry Savage

Know Your Financial Personality – Terry Savage

Instead of focusing on wild swings in the stock market, now is a great time to look within and understand your personal reaction to the headlines. And the stock market has certainly been in the headlines for the past few weeks.

Instead of the dreaded October bear market, there was a spectacular rally. But the real headlines are often made on an inter-day basis, with the Dow Jones Industrial Average losing more than 500 points and then bouncing back to close in positive territory. Or vice versa.

As an investor, how do you feel when you hear stock market news on the car radio or on the evening news?

Be honest about your reaction. Does a falling stock market give you a sinking feeling in the pit of your stomach, triggering worries about your retirement lifestyle? Or do you just smile and wonder about the next traffic or weather report? Do you immediately check the prices of individual stocks in your holdings? Do you think twice before buying that new car?

All of these reactions give you insight into your own investment personality. And instead of being ruled by emotion or paralyzed by fear, you need a sensible plan. And you might even need a trusted financial professional to help you not only make that plan, but stick to it.

This advice is not for speculators. Or even for members of Cramer’s investment club on CNBC. By definition, they time both the market and individual stocks. For some it becomes an obsession, and for others it’s a mental challenge. But if you read this column in your local newspaper, I think you have a longer term perspective. Until you don’t!

So to keep you on a steady investment trajectory, here are a few things to keep in mind:

Don’t confuse volatility with risk. Daily or intraday market fluctuations can make eating as scary as riding a roller coaster. In fact, you’ve probably heard of the VIX, an index that measures this volatility. Many use it as a warning signal or an opportunity to understand market fluctuations. Trades actually like volatility, a chance to make short bets and hopefully profit.

But if you’re not a day-trader, you can safely ignore volatility and instead worry about what happens to your money in the long run. The road to your retirement date can be bumpy, but as long as you reach and move through your retirement years with enough money to last you a lifetime, you don’t have to worry about beating the market in the short term.

Put the odds on your side
Morningstar’s market historians have reviewed the performance of large company stocks (dividends reinvested) over the past 100 years. In today’s terms, that would be equivalent to an S&P 500 stock index fund that you probably have in your company’s retirement plan.

If you hold this wallet for just one year, you have about a 50/50 chance of winning or losing money. After looking at the performance of all 5-year periods over the past 100 years, they report that you would have about a 2 in 1 chance of making money versus losing money.

But if you held this portfolio for 20 years – stocks of big companies with dividends reinvested – there is NO 20 year period in which you would have lost money, even adjusted for the historical average inflation of 3 %.

In other words, the odds are definitely in your favor if you can keep this portfolio for 20 years!

But what if you’re already retired and wondering if you’re 20? Then, in a moment of calm, you adjust your exposure to the stock market. And keep a larger amount in short-term liquid investments (chicken money), which finally offer an attractive return of around 4.5%

Panic and paralysis are an investor’s worst enemies
Truly successful investors develop a long-term plan and adapt appropriately, depending on their stage in life, changing economic needs, and changing economic prospects. The worst decisions are made based on emotion. Greed can lead you astray. But fear breeds panic and rash actions. Or it can create paralysis. Either is a losing position.

Just before the end of the year, this is the perfect time to reflect calmly on your situation with your adviser. And it’s also a good time to reassess your advisor, and how he or she is both motivated and compensated. And that’s the wild truth.

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