Avoid the Pressure

Billy Joel has a way of implanting words and rhythms into my brain forever. I could run through countless songs in his catalog and be able to discern each with a simple beat or two. That’s certainly true for his 1982 hit, Pressure.

Between the punchy pops of the synthesizer and his aggressive vocals, you feel your blood start to boil. You feel the pressure.

But here you are in the ninth.

Two men out and three men on.

Nowhere to look but inside.

Where we all respond to

Pressure!

He's using baseball as the metaphor, but that pressure is precisely the feeling you’re hoping to avoid as an investor. Pressure and stress are rarely helpful ingredients for long-term success in the stock market. So, one key to achieving your financial goals is being able to avoid that pressure.

Here’s how to do it:

Start Yesterday. If possible, start investing yesterday. If not, start today. The longer your time period, the more you can benefit from compound interest.

Under concentrate. Yes, this the opposite of overconcentrating. It really just means diversification, but my impression is that investors despise the word diversification about as much as the word budgeting.

Diversification gives you the best chance to smooth your experience. This is because most of the time, there’s at least some investments that are doing well. So, in times of crisis, you hopefully still have some winners.

Don’t be forced to sell.? This is different from feeling forced to sell. Anytime an investment is doing poorly you may feel forced to sell it. That’s a common emotion. But, being forced to sell is caused by needing cash to fund your goals. And, the reason you need to sell to fund your goals is because you didn’t build enough savings for the near term.

Let’s dive into that final point even more because this is real pressure. And, today’s markets are baiting lots of investors into this position.

Here’s an example:

It’s 1999, you’ve got all your investments in stocks. Your 401k is allocated entirely to stocks. Same for your IRA. Same for your brokerage account. You rightly believe over the long-term stocks have historically outperformed bonds and cash. True. But, your goal is to retire in 2000 so long as the computers process Y2K just fine. Fortunately, they did.

Unfortunately, the stock market started its decline just a few months later. The S&P 500 would lose about half its value over the next three years. The NASDAQ 100 fared much worse and took more than a decade to recover.

If you didn’t have enough cash to fund the early stages of your retirement, you’d be forced to sell some of your investments into that decline. You would need the money to fund your lifestyle. You may also feel forced to sell more, given the gloomy headlines you’re reading.

So, two things would both be right. Stocks outperform bonds and cash over the long-term. But, at the time you needed the money, cash and bonds outperformed stocks.

There’s also your emotional experience.

How much better would you feel if you knew you had plenty of money in less-volatile investments to ride out any short-term storm?

Here’s how this might look:

Say you’re planning to retire next year. You need to draw $100,000 a year to fund your lifestyle. You also want $300,000 to renovate your home and another $700,000 to buy a place on the lake with a dock and a boat.

In the next year, you’re likely to need $1.1 million. After that, it might normalize around $100,000 to fund your annual lifestyle.

If you’re hoping to weather a financial storm that could last 4 years, you’ll likely want at least $1.4 million dollars stashed in less risky investments—either cash or short-term bonds.

Yes, if the stock market continues to rip as it has recently, you may feel foolish for having left some return on the table. But, consider the flipside. If you’re forced to sell during a financial storm, when your portfolio is much lower, how might that ruin your dreams of retirement and lake days on the boat?

Sit with that feeling a moment. Then think about the pressure you might face to try and recapture those losses by getting even more aggressive with your investments.

A risky approach that will likely lead to a more volatile experience.

Billy Joel ends his song in the most aggressive way as he yells…

One.

Two.

Three.

Four.

Pressure!

Take time now to re-evaluate your portfolio so you don’t have to feel that way with your finances.

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Mike on the Money on WYFF News 4

The Fed lowered interest rates again this week. And, again, the bond market sent long-term yields higher. What’s going on? And, what might it mean for you as an investor and a borrower?

Watch this week’s segment for answers to those questions and more.

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Merry Christmas everyone! I hope you and your family have the happiest of holidays.

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This material is provided as a courtesy and for educational purposes only.? Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.?

All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC.

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