New Year's Intentions
I’ve come to understand that in the newfangled parlance, people are now making New Year’s intentions rather than resolutions. The distinction is lost on me, but in a nod to the modern age, I’ve put together my 2019 New Year’s intentions. And even though it’s February, there’s still plenty of time for me to make good on my outlined list. Here we go:
1. I intend to maintain an appropriate emergency fund and appropriate cash on hand for near-term expenses
Not only is this practical, but a nice cash buffer allows us to not stress too much when the market drops, since we know that we won’t need to access our investment account to pay for known expenses that may be right around the corner.
2. I intend to reduce how often I check my investment accounts
I’m a numbers guy and tend to “overcheck” my investment accounts.Unfortunately, for most people, seeing a lower account balance is more likely to trigger a desire to sell (in order to stop the pain). Start with small extensions of your current viewing patterns: if you currently check daily, change that to looking weekly. If you check monthly, try looking quarterly.And if you check quarterly, consider looking only twice per year.
3. I intend to re-evaluate my return expectations
My mantra is low-to-mid single digit returns for a balanced, globally diversified portfolio. The last few months of 2018 reminded us that negative returns are possible and continue to be part of the investment landscape, however much we might want to wish them away. But that doesn’t mean that we abandon stocks. All the historical data suggests that equities are the most reliable way to build wealth and stay ahead of inflation, and stocks will very likely outpace cash and bonds over the long term. At the same time, we do need to have realistic expectations about future returns. It’s better to have a conservative estimate and be pleasantly surprised rather than the other way around.
4. I intend to get comfortable with the risk/reward contract
Investors implicitly agree to a contract of sorts that to generate higher returns, they must assume some higher risk, in the form of volatility and higher uncertainty. Equity returns are not automatic or guaranteed, especially over the short term.Over the long term (10+ years) the odds are overwhelmingly stacked in the investor’s favor, but we must be able to endure bad days, bad months and, yes, even bad years.
5. I intend to accept that there are parts of investment return that are beyond my control
I know that my overall allocation to stocks and bonds will likely determine much of my investment return; however, I know that even with a globally diversified portfolio of stocks and bonds, I can’t diversify away all risk. I need to be comfortable with the ups and downs of my portfolio and the uncertainty that I won’t be able to fully control my investment returns.
6. I intend to recognize that I will likely have to override my brain’s initial reaction to investment losses
Humans are wired to detect threats and act quickly to elude them, either by fighting or running away. The nature of the threat doesn’t really matter. Studies have shown that our brains react similarly whether we’re seeing our portfolios drop or a poisonous snake move towards us. We identify the threat and act. But “fighting” or “fleeing” from our investments usually does more harm than good, so sometimes we need a manual override of our gut reaction.
7. I intend to play the “long game”
It’s probably best to extend the time frame over which I judge my investment returns. Rather than focusing on what my portfolio has done over the last year or two, I’ll focus on returns over 5 years or better still, over 10 years. I recognize that the long game is not just a time frame. It’s a mentality that moves me away from overreacting to short-term news and toward an educated understanding of market risk. The long game is a construct that helps us build an investment portfolio that suits our temperance and aligns with our goals. When our investments go through a rough patch and the headlines are bombarding us and we feel the urge to act, let’s step back and make sure that we’re focused on long-term goals and objectives.
As investors, we look forward to 2019 with optimism, not knowing exactly what it will bring for our portfolios but confident that the best approach is very likely to continue with our long-term investment plan. After all, in five or ten years, how likely is it that any of us will look back and say “Wow, do you remember what happened to our investments in 2019?”
Written by Joe Marques, CFP®