How to survive in an uncertain world
If you don’t control your money, your money will control you and you will be unable to achieve peace and contentment.
Any given day we are bombarded with news that can terrify. Turmoil with North Korea and Iran, trade wars with China, Russia increasing its nuclear arsenal, to name a few recent headlines. One or all can impact our economy and world security. In addition, political battles between Democrats and Republicans continue to escalate and talk of raising taxes by billions and billions of dollars to fund so-called socialist programs is gaining traction.
We seem to connect these headlines and fears with the volatility of the stock market. Many of us clearly remember that between March 2008 and February 2009, the S&P 500 dropped in value by a staggering 48%. As a result, many of us are waiting for the other shoe to drop despite experiencing the longest stock market recovery on record.
With all the fear and confusion abounding, what does this mean to your financial life and what on earth are you supposed to do about it?
Great leaders, coaches and business owners all possess core beliefs, a record of success and the character to not waver from their beliefs in reaction to outside forces. They also use processes to consistently deliver results.
Our belief system rests upon timeless principles and 92 years of independent academic research by Nobel laureates. These beliefs are:
- The importance of human behavior and sound decision making (the only thing that can be controlled).
- The everlasting truth that capitalism works.
- The knowledge that capital markets are efficient, unpredictable and volatile.
Let’s unpack each of these beliefs so you can behave properly. Each reader can act today, start to see results and over time become less anxious and fearful about uncontrollable things.
1. Human Behavior and Sound Decision-Making
- Spend less than you earn: You need to know where your money goes. Tracking personal spending as diligently as a corporate entity is a must. We’re amazed by how many smart, successful, high-income earners have only a general idea of where their money goes, at best, when we start working together. Many free tools, such as Mint.com and EveryDollar.com, are available to easily track spending and allow you to face the reality of learning where your money goes. If you don’t track your spending, anxiety can rule.
- Save systematically: Each time you get paid, set aside money to fund short-, mid- and long-term goals and priorities. Saving must be the first line item on every budget. If you don’t pay yourself first, you’ll probably never pay yourself at all.
- Avoid debt: Consumer debt must be avoided. If you have to put a purchase on a credit card and can’t pay off the balance at the end of the month, you cannot afford the purchase, so instead be patient and save. Mortgage and business debt are certainly acceptable if they are realistic and well thought through. When taking on debt, also consider worst-case scenarios.
- Give generously: This is counterintuitive to building long-term financial freedom. Those who are truly generous tend to think about money differently and truly appreciate the resources they have. We haven’t met a financially free person who is not also generous with their money. People who freely give of their resources tend to be more content and grateful.
- Set long-term goals and measure progress: You must set short-, mid- and long-term goals and consistently track your progress. You will experience setbacks from time to time, but remaining focused on goals and progress is critical for success. A failure to “keep score” and be accountable always leads to failure.
- Strive for alignment: Making decisions in a vacuum is unwise. Most benefit from wise advice. You must be aligned with your spouse on each decision. If you are not married, find a close friend or trusted adviser who can tell you the truth.
All these behaviors must occur over several years. There is simply no short cut. By implementing these behaviors, you will gain control of your money. If not, your money will control you and you will be unable to achieve the peace and contentment we all long for.
2. Capitalism Works
Look at any long-term time frame and you will see how well capitalism works and how a portfolio of stocks dramatically outpaces inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U). Between Jan. 1, 1980, and Jan. 1, 2019, the S&P 500 grew from 110 to 2607, an increase of 23 times. Inflation, as measured by the CPI-U, grew from 77 to 251, an increase of 3.2 times. Go to http://bit.ly/2PAGNIi or http://bit.ly/2ZHdpDU to measure any time frame you desire and see the consistent results.
How does capitalism work? Even while the world population has grown, the world’s standard of living has grown much faster. Today, additional billions of people have the disposable income to purchase needed (and wanted) goods and services. The companies you invest in deliver these goods and services to those people for a profit. That’s how capitalism works.
3. Capital Markets Are Efficient, Unpredictable Volatile
The truth about capital markets is best evidenced by the fact that since 1926, and as measured by the S&P 500, there have been 11 bear markets, which are defined as a cumulative loss of at least 20%. On average, each bear market lasts 1.3 years and has an average cumulative total loss of 38%. Ouch! This, of course, is the pain everyone wants to avoid but can’t, because you never know when a bear market will occur despite the noxious fear-based prognosticators who look to profit from worthless predictions.
The good news is that since 1926, 12 bull markets (defined as a gain of at least 20%) have occurred. On average, each bull market lasts 6.5 years.
The fact is you cannot experience the full benefit of a bull market without enduring the pain of a bear market. Those who feebly try to exit a bear market and buy back into a bull market typically lose the timing game. Discipline and patience (assuming you are invested appropriately in a globally diversified portfolio) have been rewarded time and time again.
What are you to do if you need to access funds for personal or business needs during wild swings in the capital markets? Here is your formula for success:
- Hire a Certified Financial Planner professional who acts as a fiduciary, meaning he or she must act in your best interests at all times. Learn more at www.cfp.net.
- Work with your CFP to create a comprehensive financial life plan based on your unique needs. You will specify all short-, mid- and long-range goals and develop plans to achieve these goals. The planning must focus on the human behaviors discussed above.
- Create a globally diversified portfolio using stocks, bonds and cash. We define this as our bucket strategy.
Here are the three buckets:
- “Bucket 1” (short term): Monies needed in the next two years based on your financial life plan. They must be in cash (preferably FDIC insured). No volatility can exist as there is no time available to recover from market losses.
- “Bucket 2” (mid-term): Monies needed during years 3 to 6. They should be invested in a globally diversified allocation of 50% stocks and 50% bonds. This moderate allocation has a higher expected return than cash and much less volatility than a 100% stock allocation.
- “Bucket 3” (long-term): Monies needed beyond seven years. They should be invested in a globally diversified allocation of 100% stock. It is the most volatile portfolio but has ample time to recover from losses. This allocation is critical to achieve a higher expected return to combat and outperform the main threat to a 30-year retirement: inflation and the loss of purchasing power. This is simply a threat that cannot be avoided.
Each year you need to reassess your short-, mid- and long-term needs and refill Bucket 1 depending on your needs. If stocks are down, sell some bonds to move money over to Bucket 1. If stocks are up, sell some stocks to move money over to Bucket 1. This approach will allow you to achieve both your short- and long-term goals.
Take these practical steps now. The path to financial peace and freedom begins with that first step.
Robert A. Sparrow, CFP, CKA, is a partner with Triune Financial Partners LLC and is experienced in serving the financial life-planning needs of clients, including veterinarians. Fritz Wood is a veterinary industry veteran with a special interest in finance. He serves on the Today’s Veterinary Business editorial advisory board.