Earning a long-term return on investments means you have to actually hold them for the long term. The long term is actually made up of many short term periods. The key to success is getting through many short term periods. We’re wired to focus more on the short term. But the magic of compounding money happens over the long term.
So what can happen in the short run that can derail you?
What if I lost my job? This is why it's so important to have an emergency reserve. That way you won't be forced to sell investments at an inopportune time. Job losses often come with recessions and those are the times when the stock market is usually down. So it's important to have several months of money stashed away to get you through this difficult time.
The same thing goes for retirees - you don't have a paycheck coming in anymore, but you still have to plan for bear markets. So it's important to have a safety net in place with assets you can use so you don't have to sell stocks to fund your income needs.
The more challenging thing to deal with is your emotions.
Investing is not easy. It can be emotionally taxing even if you do everything right. Do you remember the Marshmallow experiment we talked about? The famous study where the kids who had the willpower to forgo eating one marshmallow for 10 minutes were rewarded with a second marshmallow. Later on they did better in life because they could delay gratification. They made great short term decisions which benefited them over the long haul.
What gets lost with the study is the fact that the kids who could hold out for 10 minutes weren’t sitting there patiently. They were able to wait because they distracted themselves: singing a song, playing with their shoes, telling the researchers stories. One was doing jumping jacks. I’m sure they were going nuts inside! But the only way they made it to the long run is because they effectively managed the short run.
How do you successfully bridge short periods of time into the long term investment run?
- Understand how the stock market behaves and your expectations. The market will drop 10% on average about once a year. A 20% drop every couple years and a 30% drop every 7-10 years. This means that it’s going to feel like you are giving up ground or losing money. No one wants to “lose money.” I’m sure there are some people yelling at me through the radio saying “I lost money during 2007 to 2009 bear market.” But did you really lose it or was it temporary? The S&P 500 has averaged 6.7%/yr. since I started on the airwaves back in August of 2007, near the peak of the market.
- Write down why you are investing, the purpose of the money, and when will the funds be spent. In most cases, you will find that your timeframe is in decades not months.
- Also you need to write down the words: “Times will be tough – Stay the Course.” Get out this piece of paper when the market gets rough to remind you why you are investing.
While we plan for the long-term you need to have a plan to deal with the short term. Listen to my full podcast below.
If you’d like help reviewing your investment strategies and saving for retirement, please contact Casey Boland via email [email protected]or 513-598-5120.
Date Posted: 11/07/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence. If you would like to discuss your Retirement Income Plan with an HCM Financial Advisor, please give us a call – 513-598-5120. Located in Cincinnati, Ohio, we serve clients in 28 states, and we’d love to help.