Want to reach your financial goals? Keep your eyes on the target!

Jeff Bernier |
By Jeff Bernier

I love the art of financial planning. Part of that joy comes from having the opportunity to sit down together and explore the ‘what’ and the ‘why’ behind each person’s financial goals. If you’ve been through the process before, either with me or another trusted advisor, you know just how intimate that conversation can be. After all, most of us don’t want to accumulate wealth for the sake of being “wealthy.” What most people are focused on, really, is being “rich” in life—meaning they want to have rich relationships, rich experiences, and the freedom to live a life of their own making. So we talk about almost every aspect of their lives, and then carefully distill that information down to define a path that’s right for them.

Because the process is so personal, I get to know each person extremely well (which is no doubt why so many of my clients have become some of my closest friends). And this first step is so exciting! We’re working together to build a real, tangible blueprint to help take them from where they are today to where they want to be tomorrow. The result is a solid, realistic, and balanced plan based on specific goals and a visible target. We buckle our seatbelts, rev our engines, and we’re off.

The rest of the ride is usually pretty straightforward. Yes, life changes, and when it does, certain goals may shift a bit. But for the most part, the target remains clear and we’re able to keep the wheels rolling forward.

But when the market hits an extreme—a low point (think 2008) or a high point (think today!)—even the most grounded investor can get uneasy. Suddenly that clear target starts to look a bit fuzzy, and even if you know your blueprint is still solid, realistic, and balanced, it’s hard to block out the headlines, the office chatter, and the daily stock market updates. When that happens, you can find yourself working yourself up into a frenzy that threatens to throw your whole plan right off the road.

Whether the bull market has you questioning your strategy today, or a bear market has you questioning it tomorrow (because, yes, eventually there will be a bear market!), here are five rules of thumb to help keep you keep your eyes fixed on your target:

  1. Equities are king—even in retirement.
    Historically, equity dividends grow faster than inflation. That’s not theory. It’s fact. Between January of 1947 and July 2017, the S&P 500 delivered a compounded growth rate of 7.53% not including dividends. The dividend income alone grew approximately 6%.[1] During the same seven decades, inflation (indicated by the consumer price index) saw a compounded growth rate of 3.54%. That means that if your goal is rising income (which it should be!), equities can’t be beat. And while Fixed Income can feel attractive and low-risk in retirement, remember that the key word here is “fixed.” By their nature, these products aren’t able to keep pace with inflation and rising prices. Equities are positioned to win the race. (For more on investing in retirement, see Retirement may be the best time to “eat your principle”.) 
  2. Volatility isn’t the real risk.
    Drops in stock prices can be scary for investors, but only because people tend to equate volatility with risk. But as long as you’re continuing to invest, volatility is actually a good thing, allowing you to buy more equities at sale prices while your total portfolio continues to grow. The real risk for any investor isn’t volatility, but a permanent loss of capital that keeps you from meeting your goals. Staying invested allows your portfolio to leverage the power of capital markets to prevent the permanent loss of capital. Remember Warren Buffet’s number-one rule of investing: “Never lose money.” His second rule: “Repeat No. 1.”
  3. Capital markets mirror economic growth.
    I have faith in the organic nature of the capital market. Because we all want “rich” lives, it’s our nature to constantly strive for a better life, so we make choices every day to work toward that goal. We get up every day and head out to do a good job, trading our effort for money. We then spend the money we earn to create “rich” lives—not just with material purchases, but also with experiences, education, and philanthropy. That spending drives the economy, which drives corporate revenues, which drives business value, which drives market growth. The result: over the long-term, both the economy and the capital markets are positive about two-thirds of the time. That means we’re in a constant cycle upward (even if those dips make your heart leap).
  4. A plan built on facts beats a plan built on the battlefield.
    A sound financial plan takes economic, business, and market cycles into account, and it allocates your investments based on your own life goals. While it can be hard not to react to fluctuations in the market, remember that volatility was a part of the equation when you built your blueprint. The market itself hasn’t changed—all that’s changed is your reaction to it. Changing your plan on the battlefield could result in permanent loss of capital and, even worse, could prevent you from reaching your goals. Remember that dialing down your investment strategy will inevitably require you to dial down your spending both now and in retirement. That’s not an optimal end game.
  5. This too shall pass.
    No matter what is happening in the market today—record highs or wrenching lows—this too shall pass. The average intra-year decline in the stock market is 14%, which can make even the most stalwart investor blink. And yet the average year-over-year market growth from 1950 to 2009—even with 2008’s remarkable dip—is 7%. Of course, past performance is no guarantee of future results, but history does repeat itself, and that’s especially true when it comes to the stock market.

Investing is not for the feint of heart. The key is creating a plan based on your own goals and sticking to it. Want to learn more about how “the human factor” can derail even the best-laid plans? Check out this video or send me a note. I’m happy to help you keep your financial wheels rolling!

[1] Source: http://www.econ.yale.edu/~shiller/data.htm

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