Do you remember that scene? Tom Cruise dancing around the house in his underwear celebrating his independence while his parents are on vacation? And then things just go downhill from there! (If you don’t remember it, then it is probably because you were too young, or you live a “sheltered” life.)
Have you ever had that experience when you felt like you just couldn’t get ahead? Every time you thought you were turning a corner and things were getting back on track, something else would happen! You got into a car accident. Then your dog died. Then you got laid off, your parents told you they were divorcing, the stock market tanked, your girlfriend left you. . . ahhh! Can’t just one thing go right, PLEASE?
Ok, well not all of our lives play out like a sad country song, but I’m guessing it is safe to say that most of us have all had days, weeks, or months that feel that way. And the reality is that sometimes bad stuff happens in quick bursts.
But I hope that it is also true that you have had some moments of sunshine throughout your life. Hopefully the good times have outweighed the bad times.
So what does this really have to do with financial planning or investing? It is that we all live with risk. Every day. Every hour. Things happen that we would prefer hadn’t. But the important thing is how we are prepared for them, and how we react.
As I am writing this, the Dow Jones is bumping around the 20,000 mark, an all-time high. Quick question, do you think there is a good chance it will go down again in the near future? (Answer = yes). If it does, what will the impact be on your portfolio or retirement plans? Are you prepared for a decline, both financially, but probably more importantly. . . mentally? Are you going to run for the hills and buy gold, or are you going to ride out the storm?
You see, your ability to deal with risk comes from your ability to prepare mentally for the things that will eventually go wrong in your life. Knowing how you will react when your car breaks down is as important as whether you have roadside assistance.
While nobody can predict the future, there is a strong likelihood that the markets will go up and down on their way toward long term growth. If you like to ride roller coasters, you know that when you strap yourself into the seat that there is a very, very small (but still real) chance that the entire ride will come off the tracks and you will plummet to your death.
But you do it anyway because it is fun. You are making a calculated decision that the enjoyment that you receive from the ride outweighs the likelihood of experiencing a tragic death (but probably not from hurling on yourself).
So what’s the takeaway? It’s this. . . investing is a risky business. There is no guarantee that you will make money. If you are an investor, there is a good chance you will lose money at some point. But there is also a chance for you to make money.
Accepting and managing risk is the price investors pay for the potential for growing their investment over time. And historically speaking being well invested in the markets has provided that potential for growth, while also mitigating other risks, such as inflation.
As I said, we live with both known and unknown risks in every day of our lives, but we manage those risks by making educated, well-informed decisions (unlike Joel Goodson, Tom Cruise’s character in the movie). You do this every time you get in your car to go somewhere, and the same is true when you invest in financial markets. You know there is a chance for loss, and you weigh that against the opportunity for growth. So the bottom line is that while investing is a risky business, it doesn’t need to be overly risky for you. Start slowly and simply, and where your comfort level is.
And you may be surprised at the lessons you learn along the way. Just hopefully not quite in the same way that Joel learned his lessons about the right way to manage risk.