My most important job as a financial adviser is to keep emotions from creeping into financial planning decisions.
If you ask me what the next hot investment trend will be, I will always say, “I don’t know.”
Likewise, if you ask me where financial markets will be several years from now, I won’t try to guess.
Today’s markets can change unpredictably, even violently at times, and we need a financial plan that anticipates unexpected or disruptive changes. Also, we need realistic expectations about what investments can achieve.
I tell my clients that we are not trying to beat the market’s average return — not in the short or the long term — but we are trying to beat the average investor’s performance. We do that, again, by first reducing the impact of behaviours and emotional biases.
Here are three simple investment rules of thumb that I offer clients:
- It is historical fact that financial markets may be volatile over the short term, but historically they produce positive returns over the long term.
- It is very tough for individual investors to beat the market with any consistency. Many professional money managers don’t even do this year after year.
- We tend to underestimate our future emotions. We think we will be greedy when others are fearful. Fear is a stronger emotion and often plays a much greater role in decision making than logic.
Your risk in investing is not that you will underperform the market, or lose money in the next market downturn. Your risk is that you won’t be able to accumulate enough money to send a child to college, or that your money won’t last as long as you do in retirement.
Financial planning is not about what everyone else is doing — It is just about you.
This excerpt was posted with permission from “How to Avoid Bag Lady Syndrome [B.L.S], A Strong Woman’s Guide to Financial Peace of Mind,” (2014) by Lance Drucker, CEO and President of Drucker Wealth Management.