In his autobiography, Andre Agassi shares an important lesson he learned after winning Wimbledon. “A win doesn’t feel as good as a loss feels bad, and the good feeling doesn’t last as long as the bad. Not even close.”
In the same way, if you check your investment balance online and see your account is up $1,000 since you last checked, you feel pretty good. But what if you’ve lost $1,000? According to a concept called Prospect Theory, you’ll not only feel bad, but that loss causes a greater emotional impact than an equivalent gain.
With that knowledge, how can you make sure your feelings don’t derail your financial plans? Losses are going to happen. When they do, I want you to keep these three rules in mind.
- Don’t overreact. Fear of loss can lead to hasty decisions. The dips and downturns of the market are an integral part of how investing works. To be successful, you must ride through the bumps. Stay the course to experience long-term growth.
- Get perspective. On average, a 5% dip happens three times a year. A 10% downturn, called a correction, about once a year. A bear market, defined as a 20% drop from recent highs, occurs an average of once every three-and-a-half years.
- What are the reasons you invested in the first place? Does the basis for your choices still make sense in your current situation? The answer to this question gives you a starting point to make a good decision.
How do you decide whether to stay the course or make adjustments? Here are examples I’ve seen in my 20 years as a financial advisor:
What used to be a long-term goal may now be right around the corner. Mary* had an IRA account with a perfectly reasonable portfolio of investments for a 30-year-old. She had been a prudent, well-diversified buy-and-hold investor. But, now Mary was 58 years old and planning to retire in a couple years. It was time to revisit the plan.
One scary experience can affect behavior for years. Angie* and her husband invested heavily in technology stocks in the 1990’s when the promise of the internet was new and exciting. When that bubble burst and the market crashed in 2000, they lost more than half of their investment. Traumatized by that experience, Angie has most of her money in CDs to this day.
Short-term focus can increase worry needlessly. Tony* called, upset about the recent performance of the investments in her retirement account. It was April, so the statement she was looking at covered the three months from January 1 to March 31. While it had been a turbulent time in the markets, it was only three months. Tony was 45 years old and wouldn’t be touching that money for 20 years. We refocused her view on the growth since she first started rather than the month-to-month changes, which brought down her level of concern.
Make sure you arm yourself with information. A financial advisor can help you go through your accounts and assess if your investments are still appropriate or if it would be prudent to make other selections.
As Agassi learned, one win didn’t mean he was set for life. Likewise one loss won’t break you. Always remember you are playing a long-term game.
If you’d like help adjusting your focus, sign up for a free call.
* names changed to protect privacy.
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