• Brenden Leese, CFP®

Stick with Your Plan


Key Takeaways

  • A disciplined investor looks beyond the concerns of today to the long-term growth potential of markets in the future.

  • Don’t let emotion (or the news media) derail you from your plan. Volatility is a normal part of investing.

  • Make sure your plan is stress-tested for a “worst-case scenario”. Doing so will help you sleep no matter how much volatility comes your way.

With 24/7 exposure to alarming headlines like these, it’s easy to get unnerved about your finances:

I know it’s upsetting when so many things in the world seem to be “unprecedented” and going off the rails, but history shows the market and the economy always find their footing. Eventually, the market ends up higher than it was when you started investing and the economy grows stronger when the current headwinds die down. The other thing I’ve learned over my career is that those that who throw the covers over their heads during stressful times (I.e. get out of the market), ultimately end up regretting it. As part of our holistic financial planning process, we stress-test each client’s financial plan for "worst-case scenarios” and for a wide variety of other factors likely to be encountered over a multi-decade retirement. At the end of the day, if we express confidence in your financial plan, we mean it. That’s because we’ve put it through its paces, using powerful software to simulate thousands of potential threats and circumstances that could possibly undermine the plan down the road.

As the chart below shows, we’ve had our share of extremely upsetting events over the past half-century and I’m sure we’ll have plenty more. But a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets. So, if you stayed true to your plan and didn’t bail out every time an extreme Black Swan event rattled the markets over the past half-century, you could have earned $80 in return for every dollar you invested in 1970. Not bad!

Source: Morgan Stanley Capital International

At times like these, it’s important not to let your emotions get the better of you. When danger is on the horizon, your body’s “fight or flight” response kicks in. It’s only natural to want to take your chips off the table and hunker down in a safe place until things calm down. Unfortunately, you won’t get a memo or hear an alarm bell giving you the “all-clear” signal. Sitting on the sidelines and missing out on the market’s recovery can have a devasting impact on your portfolio, and in turn, your overall financial plan.


Three Biggest Mistakes Investors Make During Volatile Times:

  1. Trying to time the market. As mentioned above, missing out on the recovery – i.e., not following the buy low/sell high principle – can have a severe long-term impact on your portfolio.

  2. Succumbing to unnecessary stress. It can be painful to see your portfolio plummet suddenly. But if you are able to take the headlines with a grain of salt – and not check your portfolio every two minutes on your phone -- you will sleep much better at night. Easier said than done, I realize but try not to be obsessed with the alarmist headlines. It’s in the media’s interest to get you to keep reading/watching. That’s why the headlines have to scream for your attention.

  3. Not following the goals we set out for you. We work to understand each client’s specific situation and run scenarios accordingly. If a client is not adhering to these guidelines, they run the risk of outliving their money. It’s important to be honest with us about your situation so we can find a successful avenue for achieving your goals.

From the Russia/Ukraine crisis to lingering Covid, to record-high gas prices, inflation, and rising interest rates, there’s been plenty of volatility in the markets lately. Again, volatility and violent market swings will happen periodically over your lifetime as an investor. When you’ve planned for them, the damage can be minimal.


Real-world Pro and Con Examples

Remember when COVID first arrived, and the market quickly lost 40% of its value? A couple we worked with demanded that we get them out of stocks ASAP. We tried to talk them out of it, but to no avail. Sure enough, they missed the 100% run-up in the markets that followed in short order. A decision such as this leads to a conversation around reassessing goals and understanding new return assumptions after a severe hit to their retirement nest egg. On the flip side, a new client came to us in March 2020 with a lot of cash to invest from a recent inheritance. It was early in the pandemic, and he was new to investing. Naturally, he was hesitant to invest in stocks amid such a large market correction. Nonetheless, he put his faith in us and since he was able to buy everything in his portfolio at low prices, his return numbers look great, and he’s thrilled. Unfortunately, his sister (not a client) did the opposite and bailed out of the market like our former client did. I understand her portfolio still hasn’t recovered from that decision.

Conclusion

Our job is to identify the biggest pitfalls in your plan and to figure out how best to deal with them, whether that be market downturns, insufficient insurance, or a long life expectancy. If you or someone close to you has concerns about their portfolio or retirement plan during these volatile times, please don’t hesitate to reach out. We will analyze your situation, run various scenarios, and walk you through the rationale and process. That way, you’ll sleep well at night knowing you’re in good hands even when the dark clouds of doubt start looming on the horizon.

 

BRENDEN LEESE, CFP® is an Associate Wealth Advisor at Novi Wealth Partners