Wealth Column: You don’t know what you don’t know
Three principles to keep you focused as you follow your financial plan.
Between the presidential election, the coronavirus and market volatility, it seems we are getting more questions than ever before about what the markets are going to do.
Well, dear reader, it’s time for us to give you a definitive answer. This answer is well-researched, based on our vast experience as financial planners and you can take it to the bank.
The answer is … We don’t know.
Our biases get in the way
When it comes to financial planning, our biases heavily factor into our decision-making. Simply put, we don’t know what we don’t know. The result is overconfidence. We aren’t wired to know when we are making mistakes because we don’t know we are making them.
You can also tend to attribute positive outcomes to your skill, and attribute negative outcomes to simple bad luck. Say you make a trade for an injury prone player in fantasy football. He does great for two games, and you are patting yourself on the back for your great decision. Then, he gets injured. What do you do? You curse your bad luck. Don’t worry, everyone does it.
The temptation to time the markets
This is especially true when it comes to market performance. Remember when COVID-19 first hit, and the markets started tanking? Selling was a no brainer, right? And yet, if you piled on, you likely lost money, or at least missed out on gains. In one recent 20-year stretch, missing the top 10 days of trading would have cut your returns almost by half .
Know what you do know
This isn’t to say that you should just put your money away and forget about it. This isn’t blackjack. Here are three principles to keep you focused as you follow your financial plan.
Money likes time. Even if you invested in 2007, right before the stock market crash, you still likely came out well ahead. The earlier you invest money, the more you benefit from compound interest. But you can’t benefit from it if your money is pulled out.
Have a plan and stick to it. Know when and how you want to retire. Work with your adviser to establish a plan, and revisit that plan. Your financial plan will serve you better than your biases.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of “Your Money” on News Radio 830 WCCO on Sunday mornings. Email Bruce and Peg at email@example.com. Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL.