CHICAGO – I have an uncle whose life’s financial goal is to amass $1 million to leave to his children.
Farmer, frugal by nature; in his 70s, he has finally reached his goal. Instead of celebrating his wealth, be the poorest, meanest person I know.
Every purchase — and any downturn in the market — re-crosses the target line into negative numbers, leaving him with a far greater loss in his mind than he has lost in his lifetime. These dips didn’t affect his ability to get through his days comfortably — they didn’t affect his ability to afford anything he wanted or needed — but had a huge impact on his mental health and ability to enjoy financial success .
The possibility of missing his goals made him more nervous and anxious than ever.
I’ve been thinking about him lately because the market has had a miserable start to the year.
With stocks plummeting and bonds plummeting, I fear a lot of people will feel the same way as my late uncle. They watched portfolios lose ground, backtracked on important milestones and terrified.
It’s emotional, but understandable. Most investors hate losses more than they enjoy winning, but they focus on peaks, which means they internalize the high water mark whenever they see a new high in account value.
Instead of seeing earnings and progress over the years bring their holdings to a decent number, they assumed that any decline from the peak would put them in a bad number.
These profits aren’t set in stone, but that doesn’t lessen the sense of loss when a portfolio is going backwards.
Now, rising prices and high inflation have exacerbated that effect. It combines a sense of loss with the feeling of not being able to afford anything anymore, and stepping back from the portfolio mile marker feels like a high-speed drive in the wrong direction.
Hard to fight.
“Telling people not to react to these situations — because they’re better off sticking to the line they set for themselves — is not satisfying when they’re anchoring themselves at the highest level of equilibrium and don’t want to let go,” said Kristin Benz, Morningstar’s director of personal finance and retirement planning. “Nothing can make them feel better until they get back to that peak.”
While declines from peaks tend to feel like they’re quick and abrupt, investors need to be farsighted.
I can feel good about how far you’ve come, but they’re grim consolation when the stock market enters bear market territory.
At the Morningstar Investing Conference in Chicago last week, experts were quick to come up with portfolio solutions on how to invest in this storm, but there’s nothing to help nervous investors other than “hold on.” .
This may be the right advice, but it doesn’t help when everything doesn’t feel right.
Instead, nervous investors should consider a few other factors:
How did you set your goals or objectives?
A lot of people are like my uncle. He never did any analysis of his needs – in fact, his goal was to pass on wealth to his children – just to hit a big number.
You don’t save and invest because it gets you a number, you get a number because you’ve been saving and investing so you can live with peace of mind.
Are losses and setbacks important in your life, or just for your goals?
I recently spoke with a young investor who wants to accumulate $50,000 in savings by age 25. He is uneasy that a market downturn will make him short.
It’s disappointing, but the money he saves and invests puts him well ahead of his peers.
Not reaching the goal is far less important than putting in the effort and getting close.
If your portfolio remains healthy and on time to meet your long-term goals and needs, it doesn’t matter where it is now and what it has done for you recently.
Is this a temporary setback or a real loss?
I am not immune to this thought. The last time I checked my portfolio, it was below a round number that made sense to me as a goal, because that’s what I hope to achieve by age 65.
It’s disappointing, but I haven’t hit this life milestone in five years, so the drop hasn’t stopped me from hitting my main financial planning goals.
Timeframe is important when it comes to your goals. While retirees may feel the current situation more acutely than young people who are keen to save, that doesn’t mean it’s bad.
Most people would be happy to face my uncle’s situation. Even if it didn’t hit that number – which he ultimately didn’t – he would still be rich by most standards and set his life on his own terms. He has everything he wants except the number.
Do you really feel differently about your investments?
We are happy when the market is up 15% and sad when the market is down 15%. It’s the same movement, but no one complains about volatility when it’s in our favor.
If your portfolio isn’t too volatile or scary on the way to the peak levels you locked in your head, a recession shouldn’t scare you.
“Decisions are made based on the market, not sentiment,” Benz said. “Focus on what your money can do for you rather than achieving a certain goal. These are not very comfortable times, but unless you see that they think their minds have changed — the market has been different and changed forever — Otherwise don’t let your emotions prevail.”
