Know Your Money Personality – Terry Savage

Instead of focusing on the wild gyrations of the stock market, this is the perfect time to look inward and understand your own personal reaction to the headlines. And the stock market has certainly made headlines in recent weeks.

A dramatic rally took place instead of the October bear market. But the real headlines are often made mid-day, when the Dow Jones Industrial Average drops more than 500 points and then moves back into positive territory. Or vice versa.

As an investor, how does it make you feel when you hear the stock market report on the car radio or the evening news?

Be honest about your feedback. Is the stock market slump giving you a sinking feeling in the pit of your stomach that raises concerns about your retirement lifestyle? Or do you just smile and think about the next traffic or weather report? Do you check your individual stock prices instantly? Are you thinking twice about buying that new car?

All of that feedback gives you insight into your own investing personality. And instead of being ruled by emotion or paralyzed by fear, you need a sensible plan. And you may even need a trusted financial professional to help you not only make that plan, but help you stick to it.

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This advice is not for speculators. Or even for members of CNBC’s Cramer’s Investment Club. By definition, they time both the market and individual stocks. For some it becomes an obsession and for others it becomes a mental challenge. But if you’re reading this column in your local paper, I think you have a longer view. As long as you don’t.

So, to keep you on a steady investment course, here are a few things to keep in mind.

Don’t confuse volatility with risk. Daily or intraday market fluctuations can make eating feel as scary as driving a caterpillar. In fact, you’ve probably heard of the VIX, an index that measures that volatility. Many use it as a warning signal or an opportunity to understand market fluctuations. Trades actually like volatility, the ability to bet on a certain timeframe, and hopefully a profit.

But if you’re not a day trader, you can safely ignore volatility and instead worry about what happens to your money over the long term. The road to your retirement day may have twists and turns, but as long as you reach your retirement years and make it through your lifetime with enough money, you don’t need to worry about beating the market in the short term.

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Put the odds on your side
Morningstar’s market historians reviewed the performance of major company stocks (with dividends reinvested) over the past 100 years. In today’s terms, that would be equivalent to the S&P 500 stock index fund you probably have in your company’s retirement plan.

If you hold that portfolio for just one year, you have about a 50/50 chance of making or losing money. After reviewing the performance of all 5-year periods of the past 100 years, they report that you will have about a 2:1 chance of making money versus losing money.

But if you held that portfolio for 20 years, big company stocks with dividends reinvested, there was no 20-year period where you lost money, even adjusted for the historical average of 3% inflation.

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In other words, the odds are significantly in your favor if you can hold onto that portfolio for 20 years.

But what if you’re already retired and wondering if you have 20 years? Then, in a quiet moment, you adjust your exposure to the stock market. And keep more money in short-term liquid (chicken money) investments that finally offer attractive returns of around 4.5%.

Panic and paralysis are investors’ worst enemies
Truly successful investors plan for the long term and adjust accordingly based on their life stage, economic needs, and changing economic outlook. The worst decisions are made based on emotions. Greed can lead you astray. But fear causes panic and rash actions. Or it can cause paralysis. Both are losing positions.

Just before the end of the year is a perfect time to discuss your situation with a counselor in a relaxed manner. And it’s also a good time to reevaluate your advisor and how he or she is both motivated and compensated. And that’s The Savage Truth.

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