Between the presidential election, the coronavirus and market volatility, it seems we are getting more questions than ever before about what the markets are going to do. Well, dear reader, it’s time for us to give you a definitive answer. This answer is well-researched, based on our vast experience as financial planners and you can take it to the bank.
The answer is… We don’t know.
“But that’s not an answer,” you might say. Not only is it an answer, but it’s the right one, and it’s the only honest one. Embracing our limitations can help us make better financial decisions, and it’s an important aspect of your financial plan.
Our biases get in the way
When it comes to financial planning, our biases heavily factor into our decision-making. Simply put, we don’t know what we don’t know. The result is overconfidence. We aren’t wired to know when we are making mistakes because we don’t know we are making them.
You can also tend to attribute positive outcomes to your skill, and attribute negative outcomes to simple bad luck. Say you make a trade for an injury prone player in fantasy football. He does great for two games, and you are patting yourself on the back for your great decision. Then, he gets injured. What do you do? You curse your bad luck. Don’t worry, everyone does it.
The temptation to time the markets
This is especially true when it comes to market performance. Remember when COVID-19 first hit, and the markets started tanking? Selling was a no brainer, right? And yet, if you piled on, you likely lost money, or at least missed out on gains. In one recent 20-year stretch, missing the top ten days of trading would have cut your returns almost by half.
But again, we don’t know what we don’t know. You might know when to sell high, but when the market falls you don’t know when to get back in. The result is that you miss out on the gains you need to meet your lifestyle needs in retirement.
Know what you do know
This isn’t to say that you should just put your money away and forget about it. This isn’t blackjack. Here are three principles to keep you focused as you follow your financial plan.
Money likes time. Even if you invested in 2007, right before the stock market crash, you still likely came out well ahead. The earlier you invest money, the more you benefit from compound interest. But you can’t benefit from it if your money is pulled out.
Taxes are coming. If there comes a day when we don’t owe taxes anymore, feel free to call us up and tell us how wrong we were. Having a portfolio that is diversified in terms of time horizon and tax treatment may help reduce your tax burden. Remember, retirement isn’t about making money, it’s about having it when you need it.
Have a plan and stick to it. Know when and how you want to retire. Work with your advisor to establish a plan, and revisit that plan. Your financial plan will serve you better than your biases.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
This article was originally published in the Pioneer Press. You may view the article here.