Financial Strategy… Not By The Seat Of My Pants

21999187_sSome folks can fly by the seat of their pants and do just fine in life. But for most of us, if we do not have a plan, well, we just fail. I have a plan for everything I do. And for each plan, I have a strategy to implement it.
Even when I drive to a simple destination, like driving the kids to school, I have a strategy to get there. On those occasions when my plans hit a roadblock, my emotions and impulses often take over, clouding an otherwise clear judgment.
Last Thursday I drove the kids to school but had to be at the office by 8 AM for a client meeting. When I got into my car at 7:40, I knew where I was going. I knew what streets to take to make the most efficient use of my time. I wanted to get to Morse Pond as quickly and safely as I could. The problem is that I hate waiting in traffic, so when I hit it, I take side streets to avoid the mess. Which is just what I did last Thursday.
I veered from my strategy; I changed my plan.
As I did, I thought about how much smarter I was than those “other” drivers who were just sitting there, wasting time. All was great, until I hit a Connecticut slow poke, and traffic lights that didn’t go my way. I soon realized that my initial path, my strategy to get to my destination, would have been the best route had I stuck to it, even if there was some snag or setback along the way.
Making a quick turn or rash decision rarely gets me to my destination any faster.
As I sat, stalled at the light, I began to think. Many people have similar tendencies when they invest in the markets. They take those “side roads” and do not follow a strategy—they get out of the markets when their emotions run high and do not have a strategy to get back in. In fact, many investors I speak to want to move, or already have moved, to higher ground—and for good reasons.
We know that 80 percent of all volatility and significant market corrections happen in the summer and fall. So as we sail through these months, navigating our way through a turbulent sea can be a rough ride.
But, the biggest global news topic now centers on the growing threat from the Islamic State of Iraq and Syria (ISIS). They are well-funded, well-organized and brutal. Their on-the-ground army in Iraq and Syria and their extremely violent actions have the world on edge—and rightly so. In addition, our surly friend Mr. Putin continues to mess around with Crimea and Ukraine.
Let’s face it, the world’s geopolitical cycle is heating up. And it doesn’t bode well for the markets. I believe it’s just a matter of time before everyone gets a very rude awakening. Furthermore, additional demographic trends ahead could negatively impact the markets, particularly the aging population. Those trends, coupled with higher debt than what was experienced during the global financial crisis of 2008, could lead to additional volatility in the markets.
While we wait for the release of companies’ August earnings reports, their July reports were not full of berries and honey, as many companies dropped their forecasts for earnings in future quarters. Last but not least, our financial wizards at the Fed have recently chimed in that we could soon see rising interest rates.
Well, in July and August, we saw some combination of this information drive the Dow down over 300 points. I do understand why folks are extremely nervous about the markets, except the markets have recovered for now and are again at all time highs. You, Cutter Family Finance readers, have heard me preach that you must have a strategy that both minimizes market downturns and takes advantage of market opportunities. However, those that I speak to who got out of the markets when emotions ran high and are still on the sidewalk are now chasing returns. They’ve missed the upside. They do not have a strategy.
You see, investing is just like driving. We must have a plan, we must know where we want to go, and a strategy to implement that plan. We must know the route we are going to take to get there, and we must do it safely. Now, if your plan is to save for retirement and your strategy to achieve that plan is to buy stocks and mutual funds and hold on for dear life, well, you may need to alter that plan or choose not to rely on blind allegiance to an outdated strategy. But giving in to emotions and impulses usually leads to bad decisions. Don’t let those “traffic jams” cause you to alter your course. Fulfill your plan by allowing your strategy to work. Make sure your strategy involves stepping on the gas and investing in good times and throttling back to manage the downside risk when necessary . . . not just when your emotions are running high.
In times like these, we must not react impulsively. If you want to alter your course and veer from your strategy, stop! Ask for directions, assess your plan, evaluate and understand your strategy. Investing is just like driving. Isn’t it more important to arrive at your destination safely no matter how long it takes to get there?
Be vigilant and stay alert because you deserve more.