Money and the Moment:
We slow down and stare at the wreckage of an auto accident and in the course of doing so make the traffic jam longer. Does human instinct, a short-term phenomenon, help a disciplined investor? The short answer is probably not. Our fight or flight characteristics often puts us at odds with our long term interests. We look back with regret saying “I should have sold” or “why didn’t I buy more”
We open our accounts and see red, both figuratively and literally. Our focus turns to the negative, and that can put one into a panic. Even though nothing about your lifestyle has changed, except the fear of having less funds, you’ll fret that the amount available may be less than you originally forecast. So what should you do?
Know what you own and why. Leave the volatility alone. Do not login to view every move the market makes. Looking at your asset values fluctuate (daily or worse hourly) will eventually turn you into a trader on assets, which are meant for —- retirement, children, grandchildren or other long-term objectives.
Why does a “Point in time” view of my net worth matter?
Primarily as a reference point: Where are you? Do you have the correct asset mix? Should you own the same things today as you had last year, and more importantly, what about next year and the five years after that? Do you have enough liquidity or assets that you can easily convert to cash?
Liquidity matters —- You do not want to disrupt your long term plan or view because of the insecurity of not holding enough liquidity. Cash can help preserve a long-term plan.
There are a number of basic concepts in finance which apply to both individuals and business. One is how we count or measure things. In business the three primary ways are: The Balance Sheet (is it strong or weak); the Income Statement (how long can we make money on these assets) and Cash Flow (can we pay bills). For individuals it’s basically the same, just not quite as sophisticated and with one important difference —– Human Capital or your ability to make a living.
So what does this have to do with opening up and seeing all red in my account?
When individuals look at what they own they often do not factor in their entire balance sheet. They count what’s in front of them and do not step back to take a look at the bigger picture. They forget to add into the calculation of their entire net worth the value of their future income. Often when discussing net worth or asset allocation we hear that future income doesn’t count. However, to not count an asset or an expected income flow is a disservice to you. Knowing there is income expected from sources other than assets allows the assets to be positioned for longer term returns.
This brings us back to looking at the account. If you know what you own and why you own it, counting it every hour or day only serves to work against your long-term interests. You may think, “Yeah but it’s down so much, what should I do?”
The response to that doubt is again to remind yourself that maintaining long term perspective through the ups and downs of the market is the only way to successfully accomplish your financial plan. 2016 looks to be one of those years when we all have to be patient and know history repeats itself. In the long run we’re all trying to make better lives for ourselves which translates into economic growth and opportunity.
Finally, I remember the 1987 stock market debacle like it was yesterday. Years later when the market had recovered, it was clear how things had changed. The U.S. came through “Black Monday” largely unscathed. The real disaster was only beginning to unfold —– Japan. On Dec 29, 1989 the Nikkei 225 reached 38,916, 26 years later the Nikkei closed at 19,034.
Although it felt like the world was coming off the rails in the fall of 1987, our flexible system absorbed the blow and reacted in the way it has throughout history. The Dow Jones Industrial average ended 1987 at 1,939 and it ended 2015 at 17,425. Up 15,496 or 799%
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