Staying the Course: Letting your Financial Plan Work for You

A client recently told us: “Since hiring Abacus, my weekends are free now. Thanks for giving them back to me.” 

For them, “free” meant they no longer spent 5-10 hours per weekend researching and reviewing their self-picked investment portfolio. Instead, they were able to play with their kids, socialize with friends, go to the theater, and help a non-profit that shows people how to turn lawns into lunch. 

Abacus has helped many people make big life decisions, align their values with money, get more organized, and generate new ideas to transform their lives and businesses. But we also help save time. What could be a better gift? No one knows how much time we have left on this planet. And while many of us would love to have a bit more money, we’d probably fork over every last dollar to buy more time.

Stock-Picking Undermines Financial Success

Studies from the investment world show most of our efforts to pick stocks actually undermine our financial success. This is true for individuals as well as investment professionals. Is there another field where extra effort by a professional leads to lesser performance? Would a heart surgeon lower her chance of success if she spent weekends reading medical journals to learn more about the heart? Of course not! 

But when it comes to investing, studies show extra time and effort often sabotage the very returns we’re pursuing. Economic research from Nobel Prize winner Eugene Fama explains how the public markets are repricing themselves at every moment. That means it’s virtually impossible to seize even a well-researched opportunity. We might think Apple has a great new product arriving, but millions of other investors have access to the same research, so that information is already embedded in the stock’s price. 

Removing Emotions

When it comes to investing, studies also reveal we have great difficulty controlling our emotions. When mutual funds reach new heights, we tend to be buyers, and when they fall, we tend to be sellers (then we wait till they go up in price and buy again). Emotion overrides logic, which erodes our wealth and our time. If we can manage our emotions so we’re staying committed to a simple, diversified portfolio regardless of the roller-coaster nature of the markets and the economy, we’ll make more money and have more time.

At Abacus, we prepare you for long-term thinking so you’ll be able to draw a lifestyle-sustaining income from your investments for the balance of your lifetime. Our investment perspective is measured in decades, not CNBC soundbites. Our portfolio advice isn’t driven by the news, but by your values and goals. Given this goal and time horizon, our decisions are most influenced by long-term economic and market history. Our experience suggests that great companies in America and abroad have always found ways to absorb, adjust to, and ultimately overcome political, economic, and financial crises. 

What About a Financial Crisis?

It’s natural to worry about markets tanking. How can Abacus be so confident in its principles given how volatile the markets often seem? Abacus’s President, J.D. Bruce, recounts a relevant story:

 

“In March of 2009, I spent an hour on the phone with one of our clients discussing his desire to sell his stocks and bonds and move to cash. He had been living in fear since early 2008, knowing that a disaster was coming, and he correctly predicted the 2008 crash. When he originally called us in the summer of 2008 expressing his fear, we counseled him, as we do all of our clients, to ride it out, breathe through the discomfort he was experiencing and stick to the agreed upon asset allocation. He did.

When the crash came in October 2008, his prediction was proved correct and his fears were made real. He now felt that he was right and his advisor was wrong. We continued to counsel him, as we did all our clients, to ride out the crash and let us continue to rebalance his portfolio, selling bonds and buying equities while they were cheap.

By the time of the aforementioned call, the client was at his wit’s end. He knew, based on his previous correct prediction, that he was right. It was different this time and things were going to continue to be awful. He couldn’t sleep at night and his health was suffering.

All my training and all the research I had seen convinced me that there was no way to predict the stock or bond markets. I believed then, and continue to believe, that the only way to lose was to change course midstream. I quoted studies, I suggested we both just breathe together, we talked about his emotions, and I resorted to begging the client to stay the course.

The client insisted on selling and went to cash at the bottom of the market in March 2009. He stayed in cash for a few years and eventually went to 80% bonds, 20% equity, where he remains. As a result, he lost significant amounts of money compared to a client with a similar asset allocation, but who made no changes to his investment strategy. We can’t overstate the value of staying the course through troubled times.” 

 

Get Comfortable with Discomfort

We all know it requires some pain to achieve a desired goal, whether it’s training for a marathon, preparing for difficult exams, or mastering a musical instrument or dance sequence. In anything challenging, there comes a time when your mind tells you to bail out—quit—to end the discomfort.

But when we can calm the mind, we can increase our capacity to achieve while experiencing discomfort. The result is gain or growth: finally being able to play that difficult piece on the guitar, passing the bar exam, finishing the marathon, or becoming more flexible through holding that challenging yoga pose.

Similarly, with investing or saving there are uncomfortable moments, especially when the markets decrease. Like when we’re saving for a house down payment, but get jealous of our friend’s new car. The common response is to sell our investments when the markets decrease, or to buy a new car even though it will derail our savings plan for the house.

What if this discomfort is not a signal to act? If we can increase the span of time between sensing our discomfort and acting in some way to relieve it, we can make wiser financial decisions. Making impulsive financial decisions is never a good strategy for financial success. Even though there are no studies that support bailing from markets when they decrease, our minds will almost always think this is the rational thing to do. But over the long run, such behavior never seems to work out. If the market or your portfolio is taking a dip, think of your long-term goals before you abandon them. Take a deep breath and remember this mantra… 

Boring is Better

An investor of $1,000 in the S&P 500 Index in October 1989 would have $11,510 in December 2016. If that investor had tried to beat the market and missed the best 15 individual days of return of that Index, he or she would have $4,494. Missing the best 25 days produces a final total of $2,894. These are the positive returns of removing emotion from your portfolio.

A smooth investment journey is made possible by being broadly diversified across many asset classes. Also, being properly allocated between stocks and bonds, as dictated by the goals of your financial plan, will help you achieve your goals with the least volatility.

Be wary of the news machine. With a staggering variety of news sources, we are inundated with so much information from “experts” that it’s practically impossible to process it all. Financial journalism seems determined to scare us out of the markets with headline-grabbing stories, possibly because journalists are well aware that fear sells. It’s important to tune out the noise, because we know the history of finance says that markets over time will eventually go up.

What are you missing out on by focusing on the media’s addiction to forecasting the direction of the economy or the ups and downs of the market? The goal of financial planning is to expand our options and enrich our lives beyond the fear and adrenaline of watching CNBC. Although it’s impossible to predict the future, when you have a clearly defined, step-by-step plan for achieving your financial and personal objectives, the news of the day becomes less and less relevant.

Spend Time on what Matters Most

Use your weekends for what really matters: passions, hobbies, family, friends. Find a financial advisor to help you set up your money in a disciplined structure that reflects your values and eschews emotion, and then live your life in a way that’s meaningful for you. History strongly suggests that you’ll make more money with a lot less worry, effort, and time. In short, talk to an Abacus advisor today to help you sleep better at night.

Successful investing is goal-focused and planning-driven. Download our free guide offering insight on key principles to help you gain a better understanding of how investments can transform your life.

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