Shrewd investors often start out with long-term financial plans designed to meet their future needs — things like saving for college, retirement, etc. But sticking with the long-term plan becomes harder after years like 2022, in which many stock indices declined 20-30% with bonds down as well. As Mike Tyson said, “Everybody has a plan until they get punched in the mouth.” Sticking with the plan is easy during good times but becomes more critical during tough market environments.
Investing with a long-term time horizon is hard. Your life savings are paramount; when they decline, the most natural instinct is to act to protect them. It requires both discipline and emotional fortitude for clients to stay the course — to figure out an appropriate asset allocation risk profile and stick with it.
As I was writing this, I was trying to come up with an inspirational story of strength in the face of uncertainty — a lesson to help us better cope with this past year’s volatility. Instead, all I could come up with was an example from my personal life of what not to do.
Like many other Generation X adults with children, I’m a helicopter parent. I’m not sure why; maybe I should blame cable news for amplifying rare but horrific events, making them seem commonplace. But, the motivations that drive me to act like a helicopter parent are the same as those that drive our desire to de-risk our portfolios during turbulent times — we naturally want to protect something dear to us (whether it be our children or our life savings).
The problem is that we can’t avoid risk; we can only choose which type of risks to accept.
My oldest daughter just got her driver’s permit. When she was in grade school, I hesitated to let her ride her bike to school alone — it was a little dark in the morning, and she had to cross a busy street. But we weren’t avoiding risk by not letting her ride her bike to school; we were only choosing to postpone one uncomfortable near-term risk for a more significant long-term risk in the future. The skills and experience she would have gradually learned from biking to school now must be learned all at once when she is behind the wheel.
Facing risk is always unsettling. Pulling money out of the market during volatile times isn’t avoiding risk — it’s just substituting one risk for another. We can face equity market volatility or we can hold cash while inflation gradually eats away at our purchasing power. Select a portfolio allocation with a risk profile that is appropriate for you, and then stick with it for the long term.
To strengthen your resolve, it might help to reflect on some of the most uncomfortable periods of the recent past: March 2009 in the depths of the Great Financial Crisis and March 2020 during the initial Covid surge. These were moments of maximum pain, but stocks did well from these points forward. I don’t know if the market will go up or down in the near term, but it’s comforting to know that oftentimes, the worse it feels, the better the opportunity that lies ahead.
If you are a helicopter parent like me, I recommend the following books:
Free-Range Kids by Lenore Skenazy
The Coddling of the American Mind by Greg Lukianoff and Jonathan Haidt
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The views and opinions expressed by individuals are their own and not the views or opinions of their employer. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. No discussion or information contained herein serves as the provision of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal, tax, or accounting advice.