Updated: Mar 3
When it comes to investing, staying focused on the long view is a tried-and-true method that has separated the winners from the losers. This is a sentiment that we will always stand behind and share with anyone that will listen. Back in late 2020, we wrote about this topic, specifically addressing “Why It Pays To Stick To Your Financial Plan And Tune Out The Media”. The market environment was very different back then compared to today, but it is important to revisit this reminder of the importance of staying focused on the long view.
Put The Blinders On & Focus On What You Can Control
It is very hard to avoid what is going on in the markets and we do not recommend simply not being informed. However, oftentimes, the media headlines and day-to-day market movements are short-term distractions that pull most investors away from sticking to their long-term financial plans.
With that in mind and assuming that you’ve created a financial plan that is aligned with your values, time-horizon, risk preferences, etc., you will be better off putting your blinders on. By doing this, you can focus on the true drivers of increasing your resources (such as your work and passions) and the important things in life (family, friends, community, hobbies, etc.).
In addition, we know that we cannot control what happens in the markets, the economy, or how tax law may change. However, there are certain things that you can control, such as your income, spending, savings, etc. Furthermore, having diligence with following through on key financial planning action items is critical and can easily be controlled. For example, moving forward with completing your estate planning documents is a task that can have tremendous benefits on the risk management and legacy planning side of things. However, a lot of times, getting this past the goal line and completed can be a struggle for clients to follow through on.
By putting the blinders on and focusing on what you can control, you will quickly realize that what matters most is keeping on track with your own personal financial goals and tasks.
Always Go Back To Your Financial Plan
During volatile times in the market, some investors may consider taking some sort of action. However, this is not always the best answer because it is a reaction to a short-term event. Instead, when investing and saving for retirement, you always want to make decisions based on the long view and specific to your financial plan.
If you have a financial plan built out and the ability to see a “success score” using financial planning software, we always recommend revisiting your plan during times of market volatility.
By doing this, you can see if your financial plan is still in good shape or not. In most cases, a short-term downward move in the markets is not going to have a big impact at all on someone’s financial plan.
Furthermore, you can also go beyond this and even stress test your plan, modeling out how a longer stretch of volatility could impact your long-term outcome within your financial plan.
Avoid Behavioral Biases
Investing is emotional and humans are emotional creatures by nature. It is very hard to separate emotions from behavior. This is even more true when it comes to investing.
When markets are volatile and your TV (or smartphone) is constantly bombarding you with headlines about interest rates, inflation, technology stocks, etc., it is natural to let our emotions take over our thinking.
During those times, it is important to take a step back and focus on the long view. One way to “check yourself” is to educate yourself on the area of Behavioral Finance.
In short, behavioral finance is the study of the effects of psychology on investors and financial markets. By understanding this area of study more, it will make you a better long-term investor and allow you to become more aware when your emotions start getting the best of you.
Specifically, being aware of “recency bias” is a critical behavioral bias to be aware of when it comes to focusing on the long view. Recency bias is typically seen when an investor is easily influenced by recent news or a recent experience. Avoid getting too caught up in the headlines when making decisions related to your money, personal finances, investing, or your financial plan.
How We Can Help
Financial planning is not just about managing investment portfolios. More importantly, it is about having someone you trust to guide you when the unexpected occurs and to make sure your family has a trusted resource to rely on.
At Abel Financial Management, we are local, family-oriented, and truly independent financial planners with a mission to help you make smart decisions with your money. If you or someone you know faces decisions like these, we invite you to have a conversation with us.