Let me guess. You keep one eye on the stock market and one eye on your portfolio throughout the year because, like most of us, you have a good chunk of your retirement funds invested in the stock market. And being the prudent person you are, you want to be in control of what is important to you.
I have a novel idea for you that might just turn you into a better investor, and maybe, just maybe, a more fulfilled person in this world, capable of capturing more of the rich experiences life throws your way.
Invest, and live your life as if the stock market doesn’t exist. Yup — you heard me right. Live your life recognizing that the daily and yearly stock market swings are totally irrelevant to your financial well-being throughout retirement.
Let’s face it. You might be drawn to the fortunes of your favorite professional football team, with your anxiety peaking come Sunday afternoon and your mood on Monday impacted by Sunday’s outcome. But you probably don’t lose much sleep contemplating whether Sunday’s final score will influence your long-term financial plan.
So why do you agonize over the stock market more than Sunday’s score?
Most of us know that the daily stock market swings are short-term blips and not a true representation of the overall strength of the economy and resulting stock market performance. But following the stock market on a daily, weekly, or even monthly basis can turn into an emotional grind during market corrections (declines of 10 percent or more) or prolonged bear markets (20 percent declines), sapping your energy away from other, more meaningful things in your life.
Ignoring Wall Street is “almost” guaranteed to make you a better investor, as revealed by behavioral scientists Richard Thaler and Amos Tversky in a 1993 paper titled “Myopic Loss Aversion and the Equity Premium Puzzle.”
Their conclusion? During stock market declines, investors are prone to stemming the pain of loss, making portfolio decisions that are not conducive to maximizing long-term returns.
Ignoring the stock market — really ignoring the market — can be tough, unless you have first created a simple and intelligent financial plan. This exercise brings to the forefront how much you should be saving or spending in your daily life, not whether you should be buying or selling in your portfolio. Your financial plan also calls attention to your asset-allocation decision between stocks and bonds, specifically your need for higher expected returns to achieve those retirement goals.
In creating that financial plan of yours, there are a few inputs that are essential to making it authentic.
First, a financial plan encourages you to start keeping track of your spending, even if it is only a ballpark figure at first. This is important, because ideally you will want to know whether you are saving enough today to fund a $5,000, $10,000 or $20,000 monthly burn rate (expenses) in retirement.
Use realistic returns in the neighborhood of 5 percent for your portfolio projections. If the resulting portfolio performance turns out to be higher or lower, it only means you will need to save less or more each year as you update your financial plan.
I purposefully chose the tagline of my book, The Coffeehouse Investor, to read, “How to Build Wealth, Ignore Wall Street, and Get On With Your Life.” The more you turn away from the commotion of Wall Street and daily portfolio swings, the more you take charge of your personal financial destiny, and that is an incredibly powerful energy to move forward with in your life.
Bill Schultheis is the author of The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get on with Your Life and The New Coffeehouse Investor, the third edition of his popular 1998 release. Schultheis is a regular on NPR, and lectures and leads seminars. He is a partner and fee-only financial adviser with Soundmark Wealth Management in Kirkland.