The following article shows how two different people handled the same financial event in two different ways.
With the market showing extra volatility, these people saw their account balances drop by 25% in a relatively short period of time. Their investments had reached $600,000 at their peak. They now sat at $450,000.
First off, Paul.
Paul had retired a year earlier and began to live off of his savings. Watching his account drop as he was making withdrawals was putting him under intense stress. This is it, he thought to himself. I’m going to have to start looking for a job. I worked so hard for the money and now I’m watching it disappear so quickly. I am sick about this.
Paul went out of his way to learn more and more about the financial markets. The more he tried to understand the more frustrated he became. I am more confused than ever, he thought. There are so many options and opinions. Who do I trust? Everything seems to have its pros and cons. All I know is that I see my life savings draining away.
Paul started having a hard time sleeping. He would wake up in the middle of the night with a start, thinking about money. All we have to fall back on is Social Security. We can’t live on only Social Security. It would take forever to make that money again. I’m so dumb. I am too old to invest. What should I do? I know I need to at least keep up with the rate of inflation.
Paul continued to stress his body each day the markets happened to be down. Sure, there were some really good days in there, but most of them were bad. It seemed like the bad days hurt a lot more than the good days felt good.
Paul found himself checking the stock market multiple times a day. It almost turned into an obsession. Any time he had a spare moment, he would check the “stocks” app on his phone. Any time he had any expense he cringed at the thought of running out of money.
You can be like him if you want to, but please don’t be like Paul.
Now let’s learn about Tina.
Tina’s investments also experienced this same scenario, but Tina didn’t know. Tina never got around to opening her statements. She didn’t make much of an effort to pay attention to financial things. She took her monthly check and never thought much about it.
Tina thought to herself, what am I going to do today? The weather is beautiful. Really good beach day. I’ve got to plan a trip up to Pennsylvania to visit the grandkids. Being retired is great. You don’t have to answer to anyone, and you get to make your own schedule! At the end, when all was said and done, her strategy of investing in a balanced and diversified portfolio worked perfectly well. The markets rebounded and continued to grow as they had for decades.
Both Paul and Tina had identical investment returns and results. Actually, that may not be true. There is a good chance Paul made some emotional decisions along the way which dramatically reduced his earnings. By paying more attention to his portfolio he lessened his returns more and more.
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Dave’s Motivational Speech:
With all the uncertainty in the world and all the volatility in the markets, I know a lot of you are nervous about your investment plan.
This is the moment of truth, in a way. These times are what separate successful investors from unsuccessful ones. If you are able to handle temporary reductions in your account values, you will reap profound long-term returns.
Many of you have said to me, “I know the markets will come back at some point, but I don’t have time. I’m retired.”
Let’s review a quick history lesson. The markets have had significant downturns four times in the past 90 years. World War II. The markets recovered in 3 years. Oil Embargo in the ’70s. Markets recovered in 3.5 years. The internet dot com bubble in the early 2000s. Markets recovered in 3.5 years. The real estate bubble in 2008. It took 3.5 years for your portfolio to recover. |