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Managing Your Market Psychology

The following is a repost of my recently published Forbes article that I felt was important to share with our audience. 

When it comes to investing, I believe success begins with developing a long-term perspective. Many of the clients I've worked with started with nothing, but they've saved and lived within their means over the years. They've watched their wealth ebb and flow with the market cycles. They've been through it all, and because of that, they have developed long-term perspectives that have helped them realize their individual successes.

However, we live in an emotional world, and every minute of the day, we are bombarded with information about the markets, money and the future, which creates anxiety, especially for people approaching retirement. As the reality hits that you're going to have to live off your investments for the rest of your life, it's easy to worry that a market downturn like the one we experienced recently will destroy your wealth.

If we learn from the mistakes of our past, then they aren't failures — they are the pathway to answers. If you've had investments for a few decades, how did you respond in 1987 when the market had a "Black Monday?" How did you respond in 2001 and 2002 after 9/11, Enron's failure and WorldCom's demise? Did you panic and sell at the bottom? What about 2008 and 2009 during the financial crisis as Lehman Brothers failed and Bernie Madoff was exposed?

We learn the most from expensive mistakes because they demand our attention. However, as you approach retirement, you can't make expensive mistakes. You don't have enough time to learn and recover.

The Big Mistakes

The biggest mistake people can make is selling investments at the wrong time. If you've set up a plan and know you have enough capital outside the stock market to cover your income needs for a specific number of years, then you should find that it's OK to hold onto your stock investments when the market goes through a correction or bear market. You may also find that you're actually in a position to invest more, or certainly to rebalance, because as history has taught us, the market will eventually rebound.

Another big mistake people make is moving all of their money into one specific sector because it happens to be the hot place to be. They're feeling euphoric, and they think, "Wow, I have to make the most of this opportunity right now, or I'll miss out." Then the bubble bursts.

In the late 1990s, a group of people working for a local technology company were advised by a coworker in their company, who wasn't a licensed financial advisor, to move all of their money into a particular tech fund, which had grown by 50% the previous year. Sadly, when the tech bubble burst, the fund melted down. By the time they came to us, this group had lost two-thirds of their retirement savings because they chased the tech bubble, seeking short-term success instead of long-term consistency.

Beware Of Your Biases

There are biases that can negatively influence your decision-making in ways you might not be aware of. For example, we saw recency bias coming out of the economic woes of 2008 and 2009, when many people assumed that the market's downturn would continue indefinitely, and made investment decisions accordingly. Recency bias can cause us to make rash decisions.

Confirmation bias occurs when we seek out information to confirm what we already believe. For example, someone might choose a news station based on their political beliefs — they want to hear the news filtered in a way that confirms their existing views. We do this far more often than we admit to ourselves, garnering opinions and looking for research that agrees with us.

By the way, studies have shown that making investment decisions based on politics typically leads to poor performance. We often see people make knee-jerk decisions based on election results, but after a 27-year career, I have never seen any correlation between who gets elected — democrat or republican — and how the equity markets or bond markets perform. While there might be a short-term adjustment, I have never seen any long-term or lasting change.

We once had someone introduced to us as a potential client who was so upset when a certain president got elected that he sold all of his equity investments out of his diversified portfolio. We told him this move wasn't hurting the newly elected president — it was compromising his family's future. He had started with over $2 million in his portfolio, but he sold out close to the bottom of the market. Years later, the markets went on to make new highs. There was nothing we could do for him after the fact, and we didn't end up taking him on as a client.

Avoid Emotional Mistakes

The best way to avoid all of these emotional mistakes is to create a financial plan that lays out what you're trying to accomplish and why. This takes your focus off day-to-day market fluctuations and headlines and keeps you moving toward your long-term goals.

Based on that financial plan, you then create a balanced portfolio using predetermined parameters, which eliminates emotion from your decision-making.

Don't mistake a decline in the market for a permanent downturn. Past performance doesn't guarantee future results, but as of 2019, every decline in the market has been temporary. More importantly, every decline in the past 200 years has presented opportunity to those who've put parameters in place and avoided emotional reactions.

These are important points to remember as we navigate the 2020 bear market caused by the coronavirus, which is providing us the opportunity to practice these principles. Remain steady during market corrections. Stick to your plan, and stay within your parameters. Commit to your plans with confidence, and be intentional with the decisions you make along the way.

About Bill

Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.

KWMG, LLC’s dba Keen Wealth Advisors (“company”) is an SEC Registered Investment Advisor located in Overland Park, KS. The company and its representatives may only conduct business in those states where registered or where excluded/exempt or from licensure. For registration information please contact the SEC or the state securities regulators for the states where the company is notice filed. A copy of the company ADV is available upon request. Advisory services are only offered to clients or prospective clients where the company and its representatives are properly licensed or exempt from licensure. No advice may be rendered by the company unless a client service agreement is in place. This information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy and is for illustrative purposes only. Clients and prospective clients must consider all relevant risk factors involved with each strategy, including costs or fees, and their own personal financial situations before trading.

The views outlined in the book, Keen on Retirement Engineering the Second Half of Your Life, are those of the author and should not be construed as individualized or personalized investment advice. Any economic and/or performance information cited is historical and not indicative of future results. Economic forecasts set forth may not develop as predicted.

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