While we only have a little more than two months under our proverbial belt, there’s no denying that it’s been a good run thus far in 2013. Since January 2nd the S&P 500 Index has returned 9%.
In addition, all of the major indexes, the DJIA, the S&P 500 Index and the NASDAQ, have more than doubled since the low of March 9, 2009. This is a great reminder why you shouldn’t abandon your well-designed plan just because others are panicking.
On the flip side, any day now we can expect to see articles about why this is a good time to buy stocks. Why few people were saying that in the depths of 2009 is a good question you might ask.
When the news was bad and markets were tanking, I advised staying the course and adhering to your investment plan. Now I advise not getting too optimistic, thinking the “coast is clear.”
While we can all enjoy the recent successes, I certainly cannot take any credit for predicting the stock market rally. The truth is that rallies come along quite randomly, as do stock market routs. And as I’ve said on numerous occasions, no one can predict short-term stock market returns. Just a reminder, stocks can go down as well as up. Of course, you know that, but you also know that the long-term trend has been up.
So let’s bring up a subject I feel is critical to safeguarding your long-term investment experience: In good times and bad, there is an art to making quality decisions, and it may not be what you think.
Among the many roles of your financial advisor, one is to remind you (repeatedly) that the quality of your financial decisions contributes as much or more to your investment success as do the fleeting outcomes of hot or cold markets. In Carl Richards’ book, Behavior Gap, we are reminded of an important related insight:
“The outcomes of our decisions may vary. In fact, you can make a good decision and have a bad outcome. But sensible, reality-based choices are our best shot at reaching our goals.”
To illustrate, you could take your life savings toLas Vegas, bet it all on a single very lucky spin and strike it outrageously rich. That would be a great, albeit improbable, outcome … to a very horrendous decision. In contrast, you can maintain a low-cost, globally diversified portfolio that reflects your personal goals as well as the latest academic evidence on capturing market returns. Fantastic decision, even when market conditions deliver disappointing results.
This is where your financial advisor comes in especially handy. Whenever you may be tempted off-course by undesirable outcomes — or, on the flip side, by random bursts of success — you need to objectively assess what, if any, adjustments might be warranted within your plans and your investments.
As Larry Swedroe points out:
“If you have done a good job developing your plan, and it has anticipated the risks you are likely to face, you should ignore the noise of the market, not getting caught up in either the hype or the fear that bull and bear markets can cause. Just stick to your plan.”
Making confident, quality decisions toward achieving your long-term goals regardless of past-tense outcomes — that is good advice any time of year.