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Try To Remember How You Felt When The Market Tanked Last Year

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Most people I speak to have faint memories of last year’s stock market drop. The resulting increase created that memory lapse. Question: How did you feel when the market dropped?

I know some people that panicked and sold off stocks, but most remained numb and did nothing. Many of those that sold have yet to have those funds invested back in the market. Those that did nothing are back on track they were on reinvesting dividends and adding 401k, 403b and IRA funds to their accounts. Some of those people might also have more in the market, and at-risk, than necessary to attain their goals.

Too often people take on more risk than necessary to achieve their goals. You shouldn’t invest to get as much as you can, but as much as you need. When your needs are met, then the risks in your portfolios should be reduced.

I know that many of the numb people wished, at that time, that they did not have so much in the market, yet they did nothing about it. Maybe now is a good time to review your portfolio and your plans.

I posted a blog in June 20, 2013, titled You May Have Already Won Your Lottery which I am repeating part of now about taking needless risk. It is also a topic I’ve written about often and find that people need reminding of. I framed it in the context of winning the lottery.

Let’s first consider what you would do if you won the lottery… say $50 million. That would be a game-changer for most people. What would you do? Perhaps you would pay off your debts and mortgage or buy a vacation home or a super luxury car. But, how would your life change? What would you be doing in six months that you would not have done otherwise? If you are still working, you would likely quit your job… but six months out you would probably be bored and would look for something to do, possibly charity work or teaching. Other than that, most respond that there would be very little difference in their lives.

Now, analyze your present situation. See if it appears that you can do everything you would do if you won the lottery (except for the luxury spending); or rather you would not be doing much different than you are doing at present. The major change might be the feeling that you are more secure because of the extra investments.

Next think about what would happen if you lost half of your assets. It is likely that changes would have to be made in your lifestyle and your level of security would drop significantly. Then consider how much would change if you doubled your money. I suggest not much would change. The conclusion is that losing half of your assets would hurt you much more than doubling your investments. If so, why take the added risk? By the way, doubling is four times greater than being left with half of your investments. The benefits of an added investment portfolio do not seem to be worth the risk.

If your life won’t significantly change if you won the lottery, then you already won your individual lottery. Accordingly, you should adjust your risk levels downward. And if that isn’t persuasive then think about how you felt last year when the market tanked. Now consider acting accordingly.

If you have any tax, business, financial, leadership or management issues you want to discuss please do not hesitate to contact me at emendlowitz@withum.com.

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