You may be thinking, are we at the top of the stock market? If so, what should an investor do? Buy, sell, stand still? I don’t know where we are, and neither does anyone else. Sure, speculators can guess, but we won’t know for sure until we look back in the rearview mirror in a bit. Candidly, it really doesn’t matter where we are IF you’re a long-term goal focused investor. Here’s why.
The “stock market” is not always rational. Its expansion and contractions can be linked to investors buying and selling companies for a variety of reasons. Price decides how investors respond; so do dividends. Reactions can change from positive to negative back to positive all in a single trading session.
That’s why I believe it’s important to redefine “the stock market” in more real-life terms as owning (not lending to) quality companies. These companies occupy your retirement account, 529, IRA, and after-tax investment account. They are in your employer stock purchase plan and may be part of your annual bonus.
Themes to remember when thinking about the companies you own:
- They are all run by really smart men and women, not AI.
- Businesses can’t stay competitive while losing money, so companies look to generate profits after covering their costs.
- They must be resilient and work through daily obstacles while focusing on earnings and growth.
- Companies must remain relevant or risk going out of business or being bought by the competition.
This is great, but how does an investor make the most of owning companies as prices continue to climb to new highs? What next steps should be taken now, if any? The answer arrives by reviewing your financial plan. All plans are not created equally; the best plans answer simple questions such as:
“How much will it take for me to retire successfully and stay successfully retired?”
“What exactly am I retiring to in terms of my time and money?”
“How will my spending stay relevant for decades as prices continue to increase?”
Your financial plan provides directions on how to address investment changes as life plays out. Leading with planning means you are making decisions based on what’s best for you and your family. You’re priorities, choices, and goals first. Clarity arrives not by achieving a wealth milestone or accumulating $X million in your portfolios, but by defining what lifestyle and time schedule you want to keep.
Your financial plan should include these five topics:
- Liquidity and cash reserves: More investors get themselves over their skis not by investing, but by misjudging current and future cash reserves. Following a process will allow you to refill cash reserves without having to react when company prices contract.
- Diversification: Owning thousands of companies all over the world efficiently via low-cost exchange traded funds (ETFs) provides access to all businesses. Your ideal percentage of companies should be outlined in your financial plan.
- Cashflows: Create a financial plumbing system that moves the right dollars to the right account for spending, savings, giving, and living each month. Automation is your friend so there’s one less thing to think about as you enjoy what you have.
- Sending: Practice spending your money in a way that is easy to track and keeps you from going into debt. This may include debit cards, credit cards, digital apps, checks, old fashion cash, or a combination approach. Personal finance is personal so figure out what works for you and your family.
- Sustainability: You need to educate yourself on how your money is currently invested and any automated investment changes taking place. Set it and forget it can sometimes be scary.
Educated investors make better decisions in the long run and are less likely to react to what’s happening now. By creating a financial plan and reviewing it periodically, you gain knowledge and understanding on what matters (and doesn’t) when it comes to owning companies and spending your money. It doesn’t need to be more complicated than this.
