Hold reasonable expectations
If your expectations are unreasonable you will be forced by your emotions to make weak decisions. Fear, panic, euphoria and greed are poor counselors. Understand the history of the stock market before you commit to using it as the solution to your future spending problem.
Over a hundred years or of easily discovered history, it has been fairly predictable. There have been some huge swings, but they only matter to people if the people need the money on that day.
Obviously one of the things you might want to manage is the likelihood of needing the money on those days. You might want to reconsider that margin account. While you may have faith that the market will return from this low point, lenders have margin rules. Lender rules trump investor hope every time.
Reasonable expectations must address three possibilities.
- The normal return over your time frame
- The effect of temporary losses
- The effect of super-normal gains
What is your game plan for each?
Over a 24 year time span, people should expect to lose money in 3 of the years, make more than 12% in about 5 and be somewhere between 0% and 12% in the other 16. The average return over 24 years of history is not very different regardless of which 24 period you pick.
Everyone has a tolerance for ambiguity, but it is very narrow. The loss years are troubling and people can minimize their effects by diversifying. The advantage is no panic selling. The reduced potential yield is the cost of doing business.
Gains are scary too
The problem is on the high side of your emotions. At what point do euphoria and greed become problematic? At the point where you begin to lose sleep.
It could be from fear of reversals in fortune. All losses are real, remember.
It could be from dreams of a Gulfstream jet taking you and your art dealer to your yacht moored in Bimini. Exciting.
In either case the solution is the same. Sell until you sleep.
Self management matters
It is not enough to manage your spending and your investments. You must manage you. That may turn out to be the more important part.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.
In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772