What to Expect When the Stock Market Gyrates - Part III
“If a problem is fixable, if a situation is such that you can do something about it, then there is no need to worry. If it's not fixable, then there is no help in worrying. There is no benefit in worrying whatsoever.” – Dalai Lama XIV
You don’t need to be a Buddhist monk to understand that when it comes to investing, the question is “what can, and can’t, you really control?” Well-regarded and respected behavioral economist/psychologist, Dr. Daniel Crosby, recently framed this question, and I am going to examine and expand on it here:
The Biggest Thing You Cannot Control is Return. Aside from the purchase of a financial product with a fixed rate of return (like a Certificate of Deposit or Fixed Annuity), you cannot control returns. They can and will vary, as stated in all the fine-print disclosures. Even bonds may not produce the promised returns because of loss of value on sale or issuer default. However, I think you can increase your chances of acceptable returns if you focus on those things you can control.
The Four Most Important Things You Can Control are Risk, Cost, Time, and Emotion. Risk is directly linked to the possibility of losing some or all of your investments’ value. If you need $2,000 a month to supplement Social Security and/or pension, then those funds should not be exposed to potential loss. This can be controlled by what you invest in. Costs can be managed by 1. researching and selecting low-cost investments and 2. getting all fees and expenses in writing before investing. The average mutual fund costs about 1.5% per year. Careful screening can bring that down to just .5% per year. A 1% savings on a $100,000 portfolio over ten years is $10,000! Absent an emergency, investors have control over how much Time is available before their investments are harvested for income. With a proper emergency fund in place (I generally recommend 5% of total investable assets), the chances of needing to “cash out” early should be low. And finally, controlling Emotions usually results in better financial outcomes. In twenty years, I’ve rarely seen a knee-jerk reaction produce favorable results. Of course, a deliberately constructed financial plan can provide the framework for financial decisions and help investors keep cool heads when negative events occur.