Stick with Your Plan
I’ve been asked many times over my career which investment strategy I think works well or leads to the highest probability of success. While I’m always happy to discuss my personal investment philosophy and discuss the investment models I manage, the typical answer is “if you want to give yourself the best chance of succeeding, don’t bail on your investments (and your plan) during market declines”. The surest way to fail is to quit. It’s important to remain calm, tune out the noise and stay focused on the end goals. The investment strategy will not matter if you don’t see it through. When prices are falling, and the media is working hard to induce panic, remind yourself that every prior decline throughout history has been temporary.
The foundation of a solid financial plan is realistic expectations. When a freshly retired client comes to us to assist in planning for their next phase in life, one that will likely last 20-30 years, we must make some assumptions. We assume they will live to an average life expectancy (usually a few years beyond for good measure). We assume they will need steady income and cost of living adjustments. We assume unexpected expenses will arise. We also assume the markets will go through periodic declines. The last assumption may surprise some, but it shouldn’t. Any investment plan that assumes all positive years is not only unrealistic but doomed from the start. History is a great teacher. It tells us that, on average, the markets end the year in negative territory about one out of every four years. It tells us that the average intra-year decline is roughly 14%1. It teaches us that success is more common for the long-term investor.
Most of us will never forget the way it felt watching our portfolio values decline month after month during the 2008-2009 pullback. It was the largest and
most severe I’d experienced. Still, I believed it would recover. I recall advising a client to hold off on selling and stick with the plan. Their response was “you just don’t want me to sell, do you?”. “No, I do not”, I replied, “but not for the reasons you may be thinking. I’m not concerned about losing revenue from you, I don’t want your plan to fail”. If they would have sold then, it was over. The plan failed. They would never recover the loss. Fortunately, they didn’t. The plan is still in place today and still on track. They were not alone. Fear was commonplace but many, if not most, investors stuck it out. We understand the cost of the potential for a premium rate of return is uncertainty and volatility. You may recognize this story and whether you were that client or someone else in the same situation, I commend your fortitude and congratulate you on the outcome.
-Rick O’Dell
