When friends and acquaintances who know I am a financial planner bump into to me, they often ask what the market is doing that day. Lately, my answer to them has generally been along the lines of “I have no idea.” While I do follow news about trends in the financial services profession, my expertise as a financial planner leads me to pay less attention to the daily gyrations of the market.
The financial media operates 24 hours a day, 7 days a week, complete with television hosts jumping up and down and screaming “buy, buy, buy” and “sell, sell, sell” every five minutes. This chaotic environment creates a great deal of anxiety for long-term investors saving for retirement. It can also become a major distraction, focusing investors on short-term performance instead of long-term goals and objectives.
So, how can people investing for retirement stay focused on the things that matter? Here are a few suggestions.
Have a Plan
One of the most important things you can do to help yourself spend less time worrying about the stock market is to have a financial plan based on your unique goals and resources, and to update it regularly. Your plan will serve as a roadmap for your financial future, helping to provide direction for your investments and solidify your long-term outlook.
I recently spoke with a new client of our firm, who told me that while she used to check her account balances every day, she found that since creating a financial plan and turning the management of her investments over to us, she has only been checking her balances when she receives her monthly statements. She said that the planning process helped her to sleep comfortably, knowing she had a high probability of having enough money to enjoy her retirement. She’s stopped worrying about what the market is doing from one day to the next. Now, she spends more time on the golf course and enjoying time with her children and grandchildren.
Focus on What You Can Control
While we can’t control what happens in the capital markets, there are some aspects of our investments over which we do have a measure of control:
According to numerous studies, including one by Brinson, Hood, and Beebower (link: http://www.cfapubs.org/doi/pdf/10.2469/faj.v51.n1.1869), asset allocation is the primary determinant of variation in return among portfolios. Both market timing (knowing when to be in the market or out of it) and security selection (knowing which specific investments are the best ones to own) were found to be far less important than how much of the portfolio one allocates to various asset classes, e.g., stocks vs. bonds.
Every dollar you pay in expenses is one that helps someone else’s retirement plan, not yours. According to Morningstar, investors paid an average of 0.64% per year in expenses for the investments in their portfolio (source: https://news.morningstar.com/pdfs/2015_fee_study.pdf). Over time, this can add up to tens of thousands of dollars in expenses. Vanguard provides a calculator that helps put into perspective just how much fees and expenses can reduce investment gains (link: https://personal.vanguard.com/us/insights/investingtruths/investing-truth-about-cost). Although not always the answer, in many cases, the use of low-cost index funds and ETFs can help increase your returns over time on a “net of fees” basis.
While taxes are considered to be one of the “absolutes” in life, there are ways to reduce your investment tax burden. One of these is asset location, which means placing tax-efficient investments such as tax efficient ETFs in taxable accounts, while less tax-efficient investments are held in tax-deferred or sheltered accounts. Another technique, called “tax loss harvesting,” involves selling investments that have gone down in value since you purchased them, and buying similar (but not identical) investments so that you are able to use the tax loss to offset gains while still remaining in the market. By recognizing the investment loss on your tax return, you can reduce your taxable income for the current tax year and potentially for years to come as well.
When we chat with new clients at EK-FF, we always ask about the time horizon for their investments, and we’re often told that their time horizon ends when they retire. This sounds good, but unfortunately it’s incorrect. The true time horizon for retirement investors is the rest of their lives. After all, what we all want and need is to know that we will have money to provide for our lifestyle no matter how long we live. Focusing on what happens in the stock market today or tomorrow, rather than over the rest of our lives, often leads to running out of money long before we run out of life.
While sound effects from gongs and clappers and appeals to “buy, buy, buy” may make for good afternoon television, they are not a sound investment strategy. Through proper planning and the use of time-tested investing approaches that are supported by academic research, you can help yourself to stop worrying about the market, and instead start planning to live well.
If you have questions or comments, please feel free to contact me at 806-747-7995 or CRanck@EK-FF.com