By FPA member, Richard Durso, CFP®
Last Updated: May 13, 2013
Having a plan in place is a good way to achieve long-term, goal-oriented financial success, but what if you allow your emotions to deviate you from your plan?
This is not to say that adjustments are not necessary over time. As you know, life happens and change is constant. At any point in the game of life, your situation can change rapidly. Fine-tuning your long-term financial plan may be required.
Perhaps the most important guidance a financial planner can provide you is protection against yourself. You must fight the urge of allowing your emotions to gain control and losing your focus. The biggest determinant of long-term, real life investment outcomes is investor behavior. The best advice you receive may be when your advisor says: “don’t do that!” Other important advice:
- Do not sell out of all of your stocks in order to buy bonds.
- Do not allow the negative media exploit your fears of nuclear Iran, drought, terrorism, or some other current scare.
- Do not fall victim to the fear, but rather have faith and confidence in your long-term financial plan.
In 2008 and 2009 when the markets were suffering, investors who did not panic achieved much better results than other investors who let their emotions get the better of them. The lack of discipline (and proper guidance) is a major reason individual investors get poor returns. For example, for the 20-year period ending 12/31/2011, Dalbar (a research company) determined that the S&P 500 earned over 9% per year while the average equity mutual fund investor earned only 3.3%. (Reference: Quantitative Analysis of Investor Behavior, Dalbar, April 2012). That was not due to mutual funds underperforming the market, but rather due to investors moving in and out of funds and chasing the prior year’s returns. Investors outsmarted themselves.
Your success is contingent upon not allowing impulsive decisions to get in the way of your long-term financial plan. Investors who did not fall victim to their emotions in 2008-2009, although very difficult, were rewarded. Develop a long-term financial plan, block out the negative influences, work with your planner to make any course corrections over time, and enjoy your life!
Richard Durso, CFP®, ChFC, AEP® graduated from St. Joseph’s University (B.S. and M.B.A.). Richard’s specialty is to ensure that family wealth and values are passed down to future generations through proper estate and financial planning. Richard is the director of the education committee and board member for the Philadelphia Chapter of the Financial Planning Association. He is also a member of the Philadelphia Estate Planning Council.