Know Your Money Personality – Terry Savage

Instead of dwelling on the wild swings of the stock market, this is an ideal time to look inward and understand your personal reaction to the headlines. The stock market has certainly made headlines in recent weeks.

Instead of the October bear market, there was a dramatic rally. But the real headlines are often made on a daily basis, as the Dow Jones Industrial Average fell more than 500 points, then rebounded to close in positive territory. Or vice versa.

As an investor, how do you feel when you hear a stock market report on your car radio or on the evening news?

Be honest about your reaction. Is a stock market crash giving you a sinking feeling in your stomach, raising concerns about your retirement lifestyle? Or are you just smiling and wondering about the upcoming traffic or weather report? Do you instantly check individual stock prices for your holdings? Do you think twice before buying that new car?

All of this feedback gives you an insight into your investment personality. Rather than being governed by emotions or paralyzed by fear, you need a sensible plan. And you may even need a trusted financial professional to help you not only create that plan, but also help you stick to it.

This advice is not for speculators. Or even for members of the Kramer Investment Club on CNBC. By definition, they are timing both the market and individual stocks. For some it becomes an obsession, for others it is a mental challenge. But if you’re reading this column in your local paper, I think you have a long-term perspective. So do not!

So to keep you in a steady investment cycle, here are a few things to keep in mind:

Don’t confuse volatility with risk. Daily or daily market fluctuations can make eating out as scary as riding a roller coaster. In fact, you may have heard of the VIX – an index that measures this volatility. Many use it as a warning sign or an opportunity to understand market volatility. Traders actually love the volatility, and it’s an opportunity to make odd range bets and hope for profits.

But if you are not a day trader, you can safely ignore the volatility and instead worry about what happens to your money in the long run. The road to your retirement date can be full of twists and turns, but as long as you get to — and through — your retirement years with enough money to last you a lifetime, you don’t have to worry about beating the market in the short term.

Put the odds on your side
Morningstar’s market historians have reviewed the performance of large-cap stocks (with dividend reinvestment) over the past 100 years. In current terms, that would be the equivalent of an S&P 500 stock index fund that you likely have in your company retirement plan.

If you only hold this portfolio for one year, you have about a 50/50 chance of making – or losing – money. After reviewing the performance of all five-year periods in the past 100 years, they report that you will have approximately a 2:1 chance of making money versus losing money.

But if you held this portfolio for 20 years – shares of a great company with dividend reinvestment – there is no 20-year period in which you could lose money, even if adjusted for historical average inflation of 3%.

In other words, the odds are greatly on your side if you can hold that portfolio for 20 years!

But what if you are already retired and wonder if you have 20? Then, in a quiet moment, you adjust your exposure to the stock market. And keep a larger amount in short-term investments (chicken money), which finally offer an attractive return of around 4.5%.

Panic and paralysis are the investor’s worst enemies
Truly successful investors plan for the long term and adapt appropriately – based on their stage in life, changing economic needs, and changing economic outlook. The worst decisions are made based on emotion. Greed can mislead you. But fear generates panic and reckless actions. Or it could cause paralysis. Either a losing position.

Just before the end of the year is the perfect time to calmly consider your situation with your mentor. It is also a good time to reassess your mentor and how they are motivated and compensated. This is the brutal truth.

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