Use perspective to boost your nest egg

“Your perspective is always limited by how much you know. Expand your knowledge and you will transform your mind.” ― Bruce H. Lipton

The YMCA was closing early on New Year’s Eve so I snuck out of the office for a mid-afternoon jog. While chugging along, I glanced at the overhead TV and saw that it was set to CNBC. Now the last time I watched a program on CNBC can be measured in years, not months, so I was curious as to what was on. The screen was flashing “Possible Debt Deal” and a bright timer slowly clicked down the seconds, minutes, and hours until midnight, at which point life as we know it might cease to be.

In the meantime, headlines of “Buy the Dow Dogs?” and “Dow Picks to Bet on this year” scrolled before my eyes. My first instinct upon seeing such nonsense was to run toward the set screaming, “NOOOOO” and waving my arms to protect the two other joggers from exposure to this lunacy. Fortunately, I remembered at the last minute that I was running six mph on a dangerous machine, so I instead focused on staying upright. The Dow had already bounced up 100 points or so as market watchers jumped on the bandwagon. This whole scenario demonstrates short-term perspective, which can be toxic to your nest egg.

How many ends of the world have you experienced so far in your lifetime? My boys, with mortgages around 3.5%, can hardly believe that interest rates above 20% were normal under Jimmy Carter. Remember the OPEC oil crisis of 1973 which resulted in the birth of high-mileage cars? Then there was Black Monday, 10/19/87, in which the Dow lost over 22% of its value IN ONE DAY. There are folks who have never recovered from Black Friday, kind of like our parents and grandparents who have never recovered from the feeling of helplessness in the stock market crash of 1929. So I thought it would be interesting to look at what has happened since then – a little perspective check, if you will. Let’s compare the close of the market the month before Black Monday to the close at 12/31/12:

chart

Of course, the above results happened only for the investor who did absolutely nothing during that period of volatility. Unfortunately, we know that many, if not most, people did the opposite. They “got out” at the worst time possible. When a sudden change in the market takes us by surprise, our impulse is to “do something” even if we don’t know if that something is good or bad for us. But guess what? When you react from panic, you have to be right twice – when you sell and when you get back in.

Researcher Barbara Fredrickson, a founder of Positive Psychology, has discovered that negative events have much more power over our memories and reactions than do positive ones. Additional research by Boston College psychologist Elizabeth Kensinger bears this study out.  This is why we tend to flee the market when we perceive we have “lost a lot of money” while we rarely rejoice over long-term increases. But since volatility is only a temporary interruption of a permanent advance, it makes no sense to sell during these periods. Liquidating causes our fears to be realized by cementing our losses. This prevents our investments from recovering when the market does. In other words, the fear of loss is the driver of the loss.

As I’ve said many times before, emotion and money make very dangerous bedfellows. Picking “hot” stocks and attempting to time the market are not only ill-advised but help to ensure that you either work longer or retire poorer. At Milestones, we believe that successful investing is essentially a battle that takes place in your mind. Turn off the noise and don’t be sucked in by media and “financial analysts”. They are there to confuse, not clarify, what you should do.

And, by the way, the S&P 500 was 31.30 in September 1929 – the month before the market crashed. As millions of poor souls have bequeathed their terror of the stock market to following generations, it rose a cool 4,557%. That is perspective you can bank on.

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