Anticipating future pain is painful—even if it doesn’t end up happening—as my 17-year old self could tell you.
My best friend, Matt Johnson, and I did everything together throughout middle school and high school. We watched hundreds of movies (he worked at a theater) played 1000s of hours of video games and watched stand-up comedy greats on HBO into the wee hours of most weekends. We ate more frozen pizza than you can probably imagine.
When his father died, it wasn’t hard to be present for him because we were always together, but he honestly didn’t seem phased. When we talked, he was very matter-of-fact about it. He was very close to his mom, but his dad was kind of done having kids by the time he came around (His siblings were MUCH older). But the experience of his father’s death was extremely traumatic for me. I loved my mom, but my dad was (and still is – 30 years later) my hero.
My dad and I kicked the ball in the back yard together, he took me fishing, taught me how to whittle, he taught me the value of hard work, helping others and of staying philosophical about things. For weeks after my friend’s dad died, I cried myself to sleep imagining what it would be like if my dad died.
I’m 47 and I’m tearing up right now as I think about the possibility of losing my father. I know he will eventually die, but I have no way to prepare for it and when I think about the eventuality, I feel crushed by the weight of it. I want my dad, and I will call him right when I finish writing this and I will tell him again how important he is to me and how much I love him, because. . . you never know.
And that is the point. Anticipating a potential future pain is painful. It can be incredibly painful and it often moves us to take action. But a lot of the time thinking about future pain instead of being grateful and living in the present is the worst thing to do, especially regarding finances.
Two Different Times, Same Exact Response
I remember when Obama was elected. The Republican side of the aisle went bananas, and I would know because I am from South Dakota. They were absolutely certain that it was the end of the economic world as they knew it. Obama was going to drive up the deficit and destroy the economy. I know people that sold their portfolios and hid out in cash or gold because Fox News said they should. They were so wrong.
More recently, when Trump was elected, the Democrat side of the aisle went bananas, and I would know because I live in Berkeley, CA. They ARE certain that it is the end of the economic world as we know it. They believed Trump would cut taxes, and this will bankrupt Social Security and they were (are still) afraid. There are folks in Berkeley who sold their portfolios in early 2017 as Trump took office anticipating the world’s economic demise. They were so wrong.
Stop the Madness
But the reality is that markets and economies don’t care who is president. CEOs and their executive teams will work with or around whoever is in office. Just because someone who does not share your political party becomes president doesn’t mean that there are any implications for your portfolio. Business gets done – people buy goods and services supplied by companies – regardless of who controls the presidency or congress.
In fact, emotions derived from the political are only one example of our anticipating financial pain. Our emotions could be driven simply by the fact that the market has been going up for 10 years, and it has become “long-in-the-tooth.” Some people publicly anticipate a correction and recommend we sell. Or it could be that a string of good data leads people to think the FED will raise rates. Some people anticipate a crash and sell. Markets move for lots of reasons, Volatility in the market is normal. But neither the economy, nor the market’s responses, are predictable in any reliable way.
Making portfolio changes based on predicted outcomes or anticipated possibilities is
RARELY well-informed and practical. Ironically, portfolio changes that step from our emotional responses to headlines or current trends tend to do more harm than good.
Just like me imagining my father dying caused me unnecessary pain both in high school and today, people altering their portfolios because they are imagining doom are usually demonstrated wrong as their imaginings prove ephemeral or are simply resolved through natural processes. No one is wrong for their feelings, which are very natural. . . but acting on those feelings ruins a portfolio more often than it helps.
There is Another Option
Instead, a much more ultimately satisfying and wise response is to stop, take a breath, and push pause. Sure, there’s a politician that you don’t like in office, but does that have any bearing on your portfolio? There’s a good chance that it doesn’t.
The best approach to investing is not to play the guess-what-happens-next game at all. Rather than follow a pundit/guru or read the economic tea leaves yourself in some vain attempt to predict the future, your best bet is to:
- Create a personal financial life plan that lays out your priorities and trade-offs, describes the combination of saving amount and investment allocation that will most likely reach YOUR financial goals. There are many resources for this, my book is just the one I know best.
- Implement the plan. Focus on the priorities, save enough, insure the things you need to, and continue to invest in your plan-appropriate allocation. Rebalance the portfolio.
- Go about your life. Avoid second guessing the plan. Allow your belief in the plan and your patient discipline to do the rest. If your plan doesn’t change. . . don’t change the portfolio.
THIS 3rd step is incredibly difficult. The idea of not acting seems easy, even pleasant. But that isn’t the hard part… the hard part is not RE-acting. It takes an enormous effort and continuous energy to not react to the financial media. The media message will test your fortitude every single day. So, do whatever you can to simplify this. Turn off the TV, tune out the financial radio pundits, ignore the doomsday social media headlines.
Stop thinking about the market and economic implications for your portfolio. It will be just fine if you leave it alone. But if you keep tinkering with your portfolio based on the myriad short-term issues (like election cycles), you’re going to do more harm than good in the long-run.
Instead, live your life and look for the good things. Sometimes we have to dig, but joy is always there. Your present self will be happier, and your future self will likely have more money saved if you stop worrying so much about the market and economic headlines.