If you invest your money, you have to deal with stress. You ask yourself, “Is this the best place to invest?” and you ask yourself this question often.
Besides family and health, there aren’t many things more important to you than your money. I know it. You know it. We might as well admit it. This creates financial stress and makes it harder to make smart financial decisions.
But if you want to invest wisely, you have to cure your investment management stress and anxiety. The way to do that is to know and accept yourself completely and live with the consequences of your decisions – good and bad.
Let me clarify this by way of a few examples.
Dean is a risk-taker. He created a financial plan and decided to put all of his money into real estate. He really cleaned up (for awhile). But Dean always knew he was taking a risk. He knew that he’d either make or lose quite a bit of money, and he was comfortable with those risks.
He wasn’t the kind of investor who believed that “real estate always goes up in value.” Not surprisingly, over the last 3 years, a lot of Dean’s fortune has turned to dreck – which is a sophisticated financial term for… Uh… Turned sour.
You’d expect Dean to be upset. Well, he’s certainly not happy about what has happened, but this turn of events hasn’t turned Dean catatonic. He’s a risk taker, and he’s willing to accept the consequences. Dean is in the minority of investors who are really willing to take the good with the bad. How many people do you know who would be OK with this turn of events? Not many I’m sure.
Marge is very risk averse. She has never been willing to take risks. She’s kept her money in the bank. She never complained when her friends were making big bucks in the market. She knows herself and invested accordingly. Again, Marge is a rare person.
In other cases, some folks follow a systematic approach to investing and understand that at times they’ll do well, and at other times they won’t. They accept who they are, the choices they make, and the reasonable results of their actions.
I have no problem with any of these approaches.
But people run into trouble when they become “risk averse” when the market is weak and “aggressive” when the market is strong. This can be an acute problem if you are currently retired.
As I write this post, the markets seem to be turning. My experience tells me that this can be a very dangerous posture to take. Don’t get me wrong, I completely understand why people want to do this. Its just that the results are rarely good.
Why do folks fall into this trap?
I believe it relates to powerlessness. No, I’m not talking about being powerless over the market. I’m talking about being powerless over our own emotions.
It’s easy to say “I’ll ride it out, ” but it’s tough to actually do it when you are looking at big red numbers on a daily basis. It can also be hard if you have a strategy that directs you to ease up on your equity investments (and you do so) while everyone around you is making big bucks.
I’ve studied many investors who were wildly successful. I found that quite often, the method they use to invest under-performs for years. Sometimes they under-perform for three years straight. Do you know how difficult it is to stick to something that keeps doing poorly for 36 straight months? Not easy.
Your emotions will color and skew your investment decisions – especially if you are saving money for retirement. The best way to make sure you don’t follow your emotions is to acknowledge them first and then reinforce the need to stick to your plan. Go over the results of what happened to you in the past when you left the path. Hopefully, that will be enough to get you back on the straight and narrow.
So here’s my question…
If you are a person who made big changes to your portfolio over the last several months, are you OK with sticking to a more aggressive approach from here on out? Or do you expect to become more conservative if the markets turn south? If that’s the case, how will you know when to do it? Will you stick to your investment strategy no matter what? If not, how do you know it’s the right time to make a shift?