Sustainable long-term wealth is built slowly – especially during these uncertain times. It’s not the big return years we naturally think of, such as 2017 and 2019, that make the largest impact. Likewise, it’s also not the years 2012-2016 when we look back in the rearview mirror. These were the years where we witnessed increasing company values that were reflected as bigger retirement and investment account balances. As counterintuitive as it may seem, right now, despite 2020 being the odd year that it is – this is where you can make larger strides towards achieving your financial goals. Of course, you may ask, “Ryan, as I am surrounded by all of the uncertainty of today, how is that even possible?”
“Why does a year like 2020 matter so much?”
To understand this, we need to recognize how our brain is wired. No one likes to “lose” money. Our brains are impacted twice as hard by a loss versus the impact of a gain, with respect to our investment accounts. When account values decline as quickly as they did earlier this year, our brain frames this as a “loss”. No losses ever took place if you were able to withstand the uncomfortable temporary contraction of prices along with the shrinking balances. The only losses that actually took place would have been if you actively stepped in and reacted by selling your investments when their values were compressed. I say all of this to reinforce that this was a temporary state. Our reaction to the market is/was the deciding factor in whether that was an actual loss or a temporary contraction in value.
It’s important to let that idea sink-in. It’s also important to take steps that will protect our future selves from reacting and allowing fear to negatively influence us. This is the rationale for hiring an accountability partner, a financial professional, to keep you from blowing up your plan (and future self) by reacting to today’s headlines. Having a “purpose built” plan, one that is reviewed and monitored each year, provides a path for you to follow. Having that path and repeatable process provides structure. Our brain craves this structure as it makes us feel better and more confident in our decisions. Having a CFP® professional guide us along that path adds to that feeling of safety through knowing that we are not alone.
In addition, holding your investments accountable to specific goals may increase your feeling of safety related to your money. When we don’t feel safe, we react and make poor decisions. These poor decisions, such as liquidating accounts or simply holding excessive amounts of cash, eliminate any future growth or upside we may gain. These actions do not support our goals and the planning process. Our mind easily plays tricks on us as thoughts of “it’s different this time” and “we need to find safety” grow stronger the more we think about it. Far too often, we feel that safety comes in the form of reacting and doing something now, but nothing could be further from the truth. Often these reactive decisions are fear-based and do not support a feeling of safety. We begin to internally rationalize that “Doing something, or anything” has got to be better than just sitting still.
The facts show that it’s our behavior, over long periods of time, that has a greater impact on our real life returns then the actual investments themselves. Think and reflect on that for a minute. Actually, it’s worth repeating…. It’s your behavior, good or bad, that has a bigger impact on what you accomplish financially speaking, not necessarily the outcome of your investments. Building structure and process, with respect to the investment process, can positively influence your behavior.
Automation matters, more this year than perhaps any in recent memory, as it assists us with continued contributions to our investment accounts regardless of what’s taking place in the moment. These automatic purchases (which remove the personal analysis and emotion) allow for more companies to be purchased in our retirement, education, and after-tax investment accounts without our direct participation. If automation didn’t exist, we simply won’t accumulate as much as we do in times of market volatility. If it was up to us when we should invest, most of us by default, would listen to our brain and defer investing to what we feel is a more quiet and safer time. That time just doesn’t exist.
Automation allows for continued purchasing of diverse companies as their prices and values move up and down. The key is not letting your bad behavior interject itself and pausing these automated purchases when values decline. Tying your investment accounts to a particular goal, and then having them serve a specific purpose, will install more confidence in your decisions. This purpose-built plan will lead to you feeling more confident, less fearful, in the financial decisions you make.
What’s less obvious, but uber important in using automation this year, is the price you paid for the investments you purchase. These investments, different companies of all sizes, are all run by really smart men and women. They are operated to generate a profit and often accountable to a board of directors. The most efficient way to own thousands of diverse companies is through exchange traded funds. By purchasing companies when their values are low your dollar goes further, and you accumulate more companies. Automation makes this possible. The same holds true in the strong return years mentioned above. When companies are growing, and values are increasing you are purchasing fewer companies with the money you invest given their positive forward growth. The year 2020 from a financial perspective allows you to take advantage of all the volatility in pricing if you have a plan and are utilizing automation to purchase more companies at lower prices. Reviewing your goal-based plan identifies what should be invested and what should remain in cash, based on your time horizon and short-term cash reserves.
Holding cash is not an investment strategy. The amount of cash you hold is based on your liquidity needs and short-term plan. This is the value of having a job description and time horizon for each of your accounts. You will always know what you should expect from them. You have more peace of mind by allowing the accounts to contract and expand as they will, and this won’t be a surprise. You may turn your attention to what always matters most in financial planning which are your actions and behavior, along with your choices on spending and saving. All of these are inputs you directly control.
Five years from now, as we look back on this crazy year, the companies you purchased at low prices as part of your plan (using automation) will have a much bigger impact on getting you closer to your long term goals than just about anything else. Our planning process is spelled out here, in four straightforward steps. When you are ready to explore your possibilities, reach out and let us know what’s on your mind. We are happy to help.