Don’t believe all you read or hear, and stand by your convictions
What do you say to your team to make them think differently? On March 29, 1982 in the NCAA national championship game, legendary North Carolina men’s basketball coach Dean Smith was faced with that challenge. With his team down by one point, and only 32 seconds left in the game, Coach Smith called a timeout. Roy Williams, who was an assistant under Dean Smith at that time, experienced first-hand how thinking differently can be so empowering: “The talk that he gave in the huddle was the most inspirational talk I had ever heard in my life and it was the most confident, like that ‘we’re in great shape. I’d much rather be in our shoes than theirs. Isn’t this fantastic? We get to determine who wins this game.’ They left that huddle at the end of that timeout, I knew we were going to win.” With 17 seconds to go, a little-known freshman shooting guard named Michael Jordan knocked down what would be the winning shot to give Coach Smith his first national title.
Creating a winning mindset by thinking differently doesn’t just help teams win basketball games; it also applies to understanding the markets and how they relate to your personal financial situation. Prior to 2008, many investors felt they were doing just fine with their portfolio. They were regaining the confidence that they lost during the “dot-com crash” of 2000-02. The common refrain at that time was “beating the market.” The market in this case was the S&P 500 index, which represents the 500 largest companies in the US. When the financial crisis came, those same investors faced a reality check as many watched the value of their portfolio drop by as much as 50%. The question then became, what was more important – “beating the market” or not losing 50% of their portfolio? The answers were different depending upon the investor’s circumstances. Many who were retired no longer had the willingness nor the ability to be heavily invested in one market and take on the risk of substantial losses. Many who were in their 30s and 40s had the ability but questioned their willingness to take on extreme risks.
However, there were others who thought differently. They were following an investment strategy focused on trying to achieve or preserve their financial independence, regardless of where the S&P 500 stood at any given moment in time, rather than trying to beat an arbitrary benchmark. They owned a portfolio constructed of broadly-diversified assets, including small and midsize US company stocks, international and emerging market stocks, and fixed income securities, like bonds. And during the so-called “lost decade” of the first ten years of this century, when the S&P 500 averaged a negative return, these diversified investors owned asset classes that generated positive returns. At Creative Planning, we thought differently, and our clients benefitted from our approach both then and now.
Financial independence often means different things to different people, and it can be difficult to measure progress on this journey, particularly in times of volatility. Are you sleeping well at night? What rate of return do you need to realize over time to achieve your goals? Many investors without a clear understanding of what they need to achieve to realize their financial independence take on the risk of losing 35-40% of the value of their portfolio in any given year when it’s not necessary. Focusing on raw performance numbers can distract you from what’s really important, and the financial media outlets do plenty of that for us already.
Financial independence means you can make your own decisions and your own choices. If you can reach financial independence while at the same time taking on less risk, would that not be the best of both worlds? We all want to make more money with our investments, but we must think differently. What is our ability to be in the market and take on risk and what is the amount of risk we need to take?
When you think differently, you don’t get caught up in the noise of the market. If you know your portfolio is properly constructed to help you achieve your long-term goals, you will understand the purpose behind the assets that you own. You will feel good about the portfolio, be more empowered, have a better context for the construction of the portfolio, and not worry about the daily ups and downs of the market. Understanding why the portfolio is doing what it is doing, for better or for worse, removes the anxiety and gives you confidence. Eventually, you even welcome a correction in the market with open arms as an opportunity to buy low, reduce your breakeven point, and position you for higher future gains.
Over the last several months, the equity markets have been quite “exciting”. The media outlets are having a field day predicting disaster at every turn, which plays to our emotions. The constant day-to-day movements can drive out the fainthearted or cause them to jump ship at the worst possible time. Now is a great time to take control of your financial independence before the next round of media mania commences. Take away all the noise that is out there, and think:
- How can I simplify my financial life?
- How can I best stay disciplined and have the conviction to stick to a plan?
- What is more important to me: enjoying my retirement, my family, and remaining empowered? Or is it risking my financial independence by trying to earn bragging rights with my friends that I managed to beat the market in a given year?
When it comes to investing, we all have to choose a roller coaster. While big ups and downs might be more exciting for some, at the end of the day, many people prefer a smoother ride.
It’s time to channel Coach Smith: call a timeout and think differently. What does it take for you to remain or become financially independent? Have conviction, stick to the plan, and you will eventually look back and be thankful that you didn’t waste years of your life worrying about your investments.