It sure seems like we’ve had our fair share of investment volatility of this century. There have been two major market disruptions; The Dotcom bubble in 2000, where the Nasdaq composite lost 78% of its value, followed by the Great Recession of 2007-2008 with nearly a 50% drop in US Stock prices. There have been many corrections outside of the big two as well. I count eleven corrections of 5% or more between 2009 and 2013, enough to give any one heartburn. Clearly these events also garner many headlines: “This is unprecedented” scream the talking heads! The result is a constant state of worry, for many people, about their investments and financial future.
As a financial planner we speak to our clients during such events. One fear, leads to another, and people are wondering if they are going to make it financially. When we receive these calls, for the most part, we know people are going to be fine. This is because we build a financial model that looks at all of their resources and expenses. We then add assumptions to test the viability of their financial success. This is known as a financial plan. Furthermore, we subject the models to stress testing. There are several ways to stress plans.
We can assume very low investment returns. This makes sense today because the interest earned on cash and bonds instruments is very low historically.
We can introduce major Bear market events into investment returns early in the plan. Statistically poor early returns can introduce problems.
We can use forms of mathematical models that look at the client’s probability of success within poor performing markets.
Once this has been done we can create a success meter that illustrates the statistical probability of a client meeting all goals. We are comfortable if the meter falls somewhere above 75%, after the introduced stress. If we were to run into trouble, we can make mid-course adjustments by making small adjustments in spending to get back on track.
A well thought out plan relieves worry. They stand up quite well to normal market volatility. It is surprising for some to see what little effect usual market corrections have on plan success. Plan success moves very little with market corrections. There are many reasons plans fair well. Suffice to say conservative plan assumptions, stress testing, coupled a well-diversified portfolio and the fact the markets recover mean that they are very few, real, market events that clients can’t overcome.
Do you remember the headline from early January? Published January 15th, in Market Watch: US stocks post worst 10-day start to a year in history. Here is the link: http://www.marketwatch.com/story/dow-set-for-triple-digit-drop-as-oil-breaks-under-30-2016-01-15
That headline was very disturbing, yet If you had a financial plan your success meter would’ve barely moved, you were fine.
It does help to have a financial plan. It helps to have someone you can speak to when you are worried. It helps to look at your success meter and know that it has hardly moved.
The downside of the Information age is constant access to news, talking heads and drama. It seems there is a crisis every day. This is not good for your emotional health; it can lead to doing irrational things with your money.
Take a deep breath, do some good planning and get back to looking at the big picture. You may come to find out there is really a great deal of noise out there as it relates to your money. Tune it out and get back to enjoying your life doing the things that are meaningful such as: spending time with family, reading a good book, taking a healthy walk or helping a person in need to name a few.