First Things First
If you don’t yet have a financial plan, try my simple Three-Step Financial Plan. It only takes a few minutes and could make a tremendous difference in your financial future.
What Happens if Your Plan Goes Wrong?
What if you have a solid financial plan and good investments, but the market tanks and you lose a lot of money any way? No one wants to acknowledge that they have lost money. No one wants to feel like a lousy investor and I’m no different. My first instinct is to avoid reading my brokerage statements and to turn off the financial news.
But, this is a critical time to evaluate your financial plan for the long-term. It’s important for you to make sure that your plan is viable for the future. You need to cut loose of the dogs and keep the investments with promise. Now, more than ever, you need to pay attention to your investments.
Past Performance is No Guarantee of Future Results
One thing that often goes wrong, is that people base their financial plan on the past performance of certain investments and they don’t perform as well in the future. Don’t feel bad about this, because it’s a normal investment experience. Investments often perform in cycles and yesterday’s winners will likely become tomorrow’s losers.
There were a lot of smug NASDAQ investors in the late ’90s, just as there were a lot of smug Index investors a couple of years ago. Most of these people lost their shirts. Few investments can sustain outstanding performance for long periods of time. Otherwise, they will become over-valued and overdue for a correction. Don’t chase past performance. The odds are stacked against you.
It’s Always Darkest Before the Dawn
In 1987, in 1990 and especially in 2002, I lost a lot of money. I could have bought a car with cash or put a down payment on an investment property in California with the money I lost in the market during the tech bubble. But, I made all of that money back and then some in the years that followed. If I had pulled out of the market, I would have lost that money forever. Instead, I stuck it out and profited from the downturn. In fact, I increased my investments, which dramatically increased my returns when the markets rebounded.
This year, I lost a lot of money in the market from the mortgage and financial crisis. The good news is that I’m still invested in solid companies that I believe will benefit from the recovery. More important, I am increasing my investments and purchasing good stocks at incredible prices. While many investors are bailing out because of the downturn, I’m focusing on the opportunity in the rebound.
Learning from the Master
Do you realize that Warren Buffet was only worth $140 Million in 1979 and now he is worth $62 billion? Most of Warren’s success came from being a value investor, which means that he only buys stocks when they are priced attractively. Right now, some stocks are becoming affordable and Warren Buffet’s company, Berkshire Hathaway, is starting to buy again. I’m no financial genius, but I’m definitely smart enough to learn from the richest man in the world. If Warren thinks the market is going up, then I’m a cautious buyer.
The Bottom Line
The Bottom Line is that the market goes up and down, but the overall direction is up. How you deal with loss and disappointment may determine your future success. Most books and quotes from successful investors talk about having “discipline” in your approach to investing. Here is your opportunity to show discipline and stick with your financial plan. Here is your opportunity to profit from others who panic.
“Discipline is the bridge between goals and accomplishment.”
Jim Rohn – American Business Philosopher