31 March 2009
I was surprised at the feedback from my last newsletter article (Rescue Yourself - https://www.bgmwealth.com/BGMWEALTH/WEB/me.get?WEB.websections.show&SCH3656_221). Many people said I hit a nerve because they are looking for ways to be more positive in this negative economic environment. It got me thinking about what we might learn from all of this, for if you do not learn from problems, what good do they do? I urge you to incorporate these ideas in your decision-making process on a day-to-day basis.
First, clients with low or no debt have remained the calmest. Often financial planners get into discussions with clients about what kind of debt to keep - good debt (usually tax deductible like mortgages) versus bad debt (credit cards, car loans). But what I am seeing is that no debt might be the better answer since it gives freedom. Clients with low to no debt have been less concerned about cash flow and thus, can roll with the punches that the market brings. The flexibility of having more discretionary expenses versus fixed expenses can add a degree of financial peace of mind when a bad market brings out the bear. So start paying cash, and encourage your children and grandchildren to do the same. And at the least, focus on being debt-free by retirement - there is no better feeling than owning your home (and on that path, today is a great day to look at refinancing your mortgage with rates as low as they are).
Second, build arks instead of forecasting rain. Whether it was Ben Bernanke, Warren Buffet or the President of the United States, nobody saw this economic slide and resulting market turmoil coming. To be sure, there are people who will claim to have seen the signs and who got out of the market last summer, just in time. But similar to shooting a basket from half-court, just because I made it once, I do not have the hubris to think I can do it again. Luck plays into investing sometimes and that is great; just do not mistake luck for genius because changing long-term investment strategy in the middle of a bear market is exactly the wrong time. Building an ark in good times (i.e. cash and five-year bond ladders so you have the income you need when equities are not performing well) will allow you to ride the wave when the rain comes.
Third, refocus on what is important. This is easy to say and almost a little naïve but I have talked to many people lately who are excited to have found the family dinner again. Instead of going out and spending $100 on dinner, people are cutting back a little and instead making spaghetti and sitting around the dinner table talking. This is emotionally recharging a lot of batteries and will lead to better relationships. But it also reminds me of Barry Schwartz's book, The Paradox of Choice: Why More is Less. Schwartz points out that people who go through life being satisfied with their choices versus always trying to maximize every choice tend to be a lot happier because they can be content with being in the moment and not always worrying about making a better choice just around the corner (i.e. always wondering if you missed out on better investments). Sure, the $100 dinner might taste better, but the spaghetti dinner at home reconnects you with your children and grandchildren and that probably makes you happier.
While the market continues to test our nerves I believe it is time to take back control of our moods, emotions and actions. I do not know if the last three week run-up in the market is a "dead cat bounce" or the start of another bull run, and I suspect my neighbor does not know that either. So pay down debt, review your investing strategy with a long-term focus and remind yourself that things do not bring happiness, relationships do.