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Rethink Your Financial Objectives and Keep Your Emotions Out of It

Mark Zaifman   |    Tue, Jan 24, 2012 @ 08:16 AM

love hate

Since the stock market crash of 2008, investors of all stripes, but especially boomers, have had a love-hate relationship with the market. When the markets are relatively calm and trending up, we love the markets, when the opposite is true, we hate the stock market.

I’m purposely using words like love and hate to illustrate a point. These are powerful words that in turn create powerful and impactful emotional responses. And if there’s one area of life that truly benefits from rational decision making as opposed to emotionally based decision making, it’s the world of investing.

Now take it a step further. Here we are in 2012, with an estimated 10,000 baby boomers in the U.S. turning 65 every day for the next 10 years.  A large portion of these boomers were so freaked out by the 08’ crash that they pulled their funds out of the market and have yet to get back into the market.

And where’s all this money parked?  Some estimate it to be in the $2 trillion category and the vast majority of it is sitting in savings, checking, money market and CD accounts earning about 1-2% interest per year.

Avoiding Risk Can be Risky

From an emotional point of view, I understand fully and completely why the 08’ crash would have investors scared silly to get back into the market. And I understand further that observing the volatility in the stock market last year would reconfirm your decision to avoid any risk with your money.

That said, unless your investment portfolio is in the multi-million dollar range, avoiding risk all together will not only be extremely risky to your overall financial well being, it can wreak havoc with your plans for retirement.  That’s because if we assume an annual core inflation rate of 3% and you’re earning say 1-2%, the value of your investments purchasing power is actually going negative each year, meaning, playing it too safe is actually quite risky to your overall financial security.

Most of us find it difficult enough in ‘normal’ times to take a long-term approach to investing. So when prices are rising and falling 2% a day and all the news is doom and gloom, seeking a safe harbor in the storm is a very appealing and emotionally satisfying response.  That’s why we’ve seen so much cash pour into the safest and lowest earning assets available.

Rethinking your Financial Objectives

Yet when the storms do eventually blow over, we’ve seen much of this money make its way, albeit little by little, back into the stock market. Yet something strange is happening to this usual virtuous cycle. The money that was pulled out of the market in 08’ has stayed out for the most part and it appears many people have given up on the stock market entirely.

That’s not a good thing, especially for baby boomers nearing retirement.  After all, in a capitalist country, owning some capital is usually a smart way to make money. If you’ve decided that, in a market as volatile as this one, the only way to win the investing game is simply not to play, I highly urge you to rethink your financial objectives.

The Importance of Being a Long-Term Investor

Many of the new clients I’ve met so far this year have had the majority of their nest egg sitting in cash. After pulling all their 401k, 403b, and IRA money out of the market three years ago, they have yet to put it back in. Although in the short to mid-term that feels comforting, is it rational to keep your money that ought to be invested for the long-term in the market earning 1-2%? The answer is no.

How much risk you need to take with your investment portfolio is a matter of serious analysis. Yet thinking you can avoid risk all together by playing it safe and earning 1-2% annually is more of a risky strategy than you can imagine.

Bottom line: From an emotional point of view, fear distorts our rational decision making process when it come to investing and greed follows behind at a close second.

If you’re someone that understands intellectually that earning 1-2% annually could be harmful to your long-term financial security yet you feel unable to break through the barrier of fear constantly confronting you, I hope you'll contact me. Together, we’ll turn your fear into faith, your faith into personal financial empowerment, and your newfound empowerment into self-confidence that will get you back on the road to financial success.


Image credit by Jarenberg