Near the end of the classic movie “Meatballs”, Bill Murray inspires his group by telling them not to worry about the score and ends with a chant of “It just doesn’t matter.” Yes, I know I skipped over a few jokes in between but for our purposes today let’s stick with Murray’s chant. This scene came to mind as I was putting recent market moves in context for a family we work with.
Our clients, “Jim” & “Louise”, were worried about their investments and wanted to “sell everything” and stay in cash. I was sympathetic to their fears, since the market drop was significant. There are very few of us that watch the stock market drop 10% over a short period of time and not get at least a little concerned. However, too often we as humans allow ourselves to get caught up in an event without asking how important it really is to us. Watching our investment values go down is stressful. The closer we get to retirement, the more stressful it can be.
As the apprehension builds, many of us would be well served to channel Bill Murray.
One of the greatest misunderstandings regarding investing is that of returns. Returns are reported based on some arbitrary time period. The nightly news reports the daily move from the market close the previous day to the market close that day. Ask yourself, how often do I buy at 4 pm and sell exactly 24 hours later? The answer is very rarely. You can take that question even further out- how often do you buy on the 31st of December and sell exactly 365 days later? Again, rarely. Investment product sponsors are incredibly good at picking time frames that support their offerings. Long-only products are going to do their best to ignore the 2007-2009 market, while products that claim to “protect” you will try to include that period.
I’m not saying your investment returns are not important; they are. Of the 18 risks we have identified for people in retirement, two are directly connected to returns. There are times when markets going down have a real impact on us. But arbitrary time period returns just don’t matter. For example, if you need to sell because you’re ready to buy a house, experiencing a 15% drop in your portfolio at that time does matter (ignoring the question of why you would have the money for a house purchase invested in something that could go down 15%). It is for this reason we routinely discuss with clients their upcoming cash needs. Generally speaking, as you approach a due date for an expense, you want to reduce the risk of that money going down.
So what does matter? What did Jim, Louise and I talk about? Their goals. We reviewed the planning we had done and asked if anything had changed. We then verified that we had enough cash set aside for upcoming expenses. Once we concluded that nothing had changed and the investment mix we had was the right mix for their situation, they felt better. Please note, I didn’t say they completely stopped worrying. Like I said earlier, watching these big moves can be unsettling, to say the least.
Focusing on your goals can help you stay calmer during market storms. (Speaking of storms, cliché storm approaching.) The reason you plan is to understand where you are and where you want to be. Knowing your goals allows you to see the forest through the trees. Panic selling when you still have 30 years of accumulation ahead is a good way to (maybe) win the battle but lose the war. Having this anchor in the storm will help keep your emotions grounded. Not having a financial plan is a real-world case of failure to plan is planning to fail. (Cliché storm has now passed.)
I am not arguing you should never look at your investments. Instead of looking at the percent return however, you need to understand if the investment is doing what is supposed to do and if there is a better option available. A stock index fund will be down when the stock market is down – that doesn’t automatically mean you should sell. If it isn’t up when the stock market is up, then it is time to look at it closer. While it is fun to talk about a great investment return or avoid a horrible loss, when it comes to a 30-year plan, a 3-month return, say it with me, “just doesn’t matter.”
Kevin focuses on helping people with retirement income planning. He is concerned that too many people become overwhelmed as they shift from building their retirement savings to using their retirement savings to support their desired lifestyle. By engaging in a robust planning process, he aims to lessen the financial fears we all have after we end our careers. Learn more about Kevin