How A Financial Plan Can Help Endure Market Volatility

We’re big on James Clear around here, specifically for his insight into habits and behavior. If you aren’t familiar, James Clear is the author of the worldwide bestseller, Atomic Habits: Tiny Changes, Remarkable Results (2018). His wisdom took the world by storm in 2018 and hasn’t lost its fervor since.

In a nutshell, we believe his insight into habit formation can really help you accomplish more by focusing on less—which is exactly the underpinning theme of our article today.

Your financial plan helps you focus on less so you can accomplish more as an investor.

Volatility is Uncomfortable, But Selling Can Make Things Worse

It’s no surprise that both the bond and equity markets have thrown everyone for a loop this year. Not that the volatility doesn’t make sense given rising inflation and interest rates, but just in the way that volatility can be supremely uncomfortable. It’s not easy to see your portfolio dip at any stage of life.

Not unsurprisingly, the costliest mistakes made by investors occur when the road gets rough. Because humans are naturally loss-averse, we feel inclined to “do something” when we see dips in our portfolio. Should we sell? Move to cash to protect against further decline?

But, in reality, selling out and sitting on the sidelines is almost never the right move. It not only locks in your losses (remember, nothing is lost until the investment is actually sold), but almost always ensures you miss out on the market’s best rebound days—the effect of which can be more injurious than simply staying invested through the entire cycle. In fact, investors are typically rewarded by seeing the cycle through to the end with these rebound days that help recoup the value of their portfolio…and then some!

Temptation is Everywhere, Especially in a Volatile Market

But how do we fight the temptation to “do something” impulsive when we feel so gosh darn uncomfortable? This is where we rely on the wisdom of our friend, James Clear. We suggest focusing on less so you can accomplish more, and your financial plan is exactly what will help you do that. 

You see, humans are goal-oriented by nature. We are often best motivated when we can see what the results, or reward, for our efforts will be. This is easy with short-term goals as the reward is provided within a stimulating amount of time. But with long-term plans like losing weight or investing, the reward is often far away and harder to keep an eye on. Those cupcakes in the breakroom sure do look good but fitting into your new summer swimsuit might be more rewarding, even though the “prize” won’t be felt until later down the road.

Breakroom cupcakes = instant gratification = small reward NOW

Choosing your protein/veggie lunch you packed instead = delayed gratification = greater reward LATER

Investing is really not much different. It might be nice to take advantage of that Hyatt Vacation Club offer that just came in the mail. I mean who wants to turn down a 4-day, 3-night stay in a villa in Key West, FL for $399? But being able to send your son or daughter to college without the financial burden of a tuition bill will likely be much more rewarding. 

Key West vacation = instant gratification = small reward NOW 

Handing your child a fully funded 529 = delayed gratification = greater reward LATER

But even so, the temptations to sell investments in a volatile market, eat the cupcakes in the breakroom, or go on that extra vacation are still there. And to fight against our human urge to do something potentially injurious, we need a long-term financial plan in place to guide us.

Your Financial Plan Helps You Keep Your Eyes on the Prize

We know that your long-term goals are important to you. And they are important to us, too. But you know who they aren’t important to? The market. The market does not care about your risk tolerance or your goals. It’s going to do what it wants to do regardless of your feelings. 

So, when things go south, you start seeing media headlines of an impending crash or recession. Your buddy says he’s moving to cash and you should, too. It seems panic is abound. What will you do? 

Focus on your financial plan. It’s as simple and straightforward as that. 

You see, the goal of any well-crafted financial plan is to help you focus on what you want to do with your money—not the trends and noise that can pull you off track. Sure, your plan must be flexible. Yes, you must re-balance your portfolio to avoid taking on too much risk, but you don’t need to focus on anything besides the guiding motivations behind the financial plan you and your advisor put together in the first place.

-Funding your child’s 529 so they don’t have to take on student loans at 18

-Buying an investment property you and your spouse can move to once you retire

-Leaving a thriving business behind as a legacy for your heirs

These are where you should cast your gaze, not in the frenzy of your newsfeed. Instead of letting market movement (or the perfect amount of cream cheese frosting atop that pillowy red velvet cupcake) pull you away from your goals—take a look at your plan for guidance.

There’s no way to see into the future, but there are ways to create them regardless of what the market feels like doing week in and week out. And at RiversEdge Advisors, that’s what we’re in the business of doing—creating futures. Let us help you create yours, too.