Originally published 6/29/2010 at the Financial Planning Association(r)'s All Things Financial Planning Blog
Robert Schmansky, CFP(r)
As a watcher of many business pages, I’ve noticed over the past several years that today’s news carries a more negative tone than ever. The title of every story seems at times to shout at us, “Are you afraid of the next crisis, well, you should be!”
What do we fear next? Inflation, or deflation? Domestic or international investing? Missing out on a boom, or investing just before a bust?
Too often I speak with individuals who have formed financial opinions based on a snapshot from the media. And with all of the negativity, what impact does what we read / watch / hear have on our success as investors?
As an advisor and observer, it can be amazing the impact that a few seconds of a pessimistic ‘expert’ opinion can have on us. Many times I meet with state a fear of an economic collapse. Pressing further, the concern is a hyperinflation which would wreck the purchasing power of the dollar.
And while the concerns are real, the actions we want to take very often do not fit the concern. The instincts of many who state the above concern is often to dump their stocks and place their savings in fixed investments; not realizing by doing so they are guaranteeing to be hurt the most by inflation, and lose out on the chance of their assets increasing with inflation.
It’s interesting to witness that while humans are hardwired for cyclical thinking, we tend in the short-run to focus on extremes, believing the end result is the continuation to an severe degree of whatever the concern may be.
Despite the news today of countries defaulting, the market correction, and fears of a double-dip, there is plenty of room for optimism:
Many of our client portfolios have fully recovered from the 2008 crash due to saving and the market rebound in 2009.
Like Joe Pitzl’s recent post points out, we have choices for discretionary spending. We don’t have to upgrade to the 50-inch plasma.
Assets that have dropped like real estate are more accessible today to more buyers. Prices of these assets won’t drop to zero as more buyers enter the market.
The pace of technology has made our personal and work lives more productive.
The markets are not ‘going to zero’. Even if a major company collapses, opportunities for others exist, and there will be growth for entrepreneurs who capitalize on them. I see it in my own industry, and work with many who see things developing all over the economy.
Volatility is scary, but market volatility has worked in long-term investors favor as they buy stocks at a discount.
At a distance, with more information, the news is rarely as bad as seems in the moment. To avoid the trap of making constant changes to your plan based on negative news and emotion, try this exercise.
Keep track of your current opinions and concerns about the economy, and the actual outcomes. Answer the following, and repeat the exercise next year:
My three biggest economic concerns are?
I am concerned about the economic picture of _______ (country).
Over the next year the stock market will (rise / fall) ___percent.
Interest rates over the next few years will (rise / fall) ___ percent.
My instinct today is to (sell / buy) stocks.
Looking back, I am sure most of our short-term concerns in the long run do not carry the extreme consequences we fear. There is plenty of room for optimism today — and maybe it can best be found by not upgrading your news to view on a 50-inch plasma!
