Planning The Next Twenty Five Years | Gary's $$$ and Sense Blog

I am sure you read this headline and said are you are nuts, you can?t plan the next twenty-five years.?I can assure you I am not nuts and here is what I am trying to get at.

As I have said elsewhere,?the biggest determinant of your portfolio size is your behaviour not the investment. Avoiding emotional, fear based decisions, will have a??positive impact on ?your wealth.

So when is the best time to avoid emotional decisions?

Seems to me the best time to make decisions is when you are not emotionally anxious.

Begin With The End In Mind

No doubt you have certain financial goals for yourself. Perhaps you have a picture of your retirement years, how much income you will require to finance that lifestyle.

It isn?t very hard making certain assumptions to figure out how much capital is needed?to deliver that income and how much you need to save between now and then at assumed rates of return. These rates of return are averages and often lead us into false conclusions or a false sense of security.

This rational approach to retirement planning avoids the ups and downs of the journey. It is how we react in these up and down periods that is critical.

The market in the long-term may average 8% or 9% as a return but in the short-term it can have significant losses such as 2008 where the S&P 500 dropped by nearly 39%??This is what we need to focus on, how we react to the volatility.

Now as you sit imagining that drop in one year no doubt you feel the fear and emotions investors felt in 2008. They hadn?t planned on the Great Recession occurring.

Their emotional anxiety at the time forced them into decisions that after the fact they would regret. They sold, consolidated the loss and reduced their anxiety. In turn they missed the recovery from March of 2009 to the present time.

So let?s look at this slightly differently.

Let?s imagine the twenty-five years to your retirement, assuming you are 40. We know there will be booming periods and there also will be negative recessionary times. The key is to plan now what we will do if we encounter these turbulent times.

In the boom times will you abandon your plan and go all in risking the possibility of buying high? Many investors did just that before the Dot.Com bust.

In the bad times will you bailout again risking the possibility of selling low?

If your plan calls for an ?average of 6% or 7% return to achieve your goal in the long-term then the boom times will offset the bad times if only you remain disciplined to stay the course. Try to ignore the short-term volatility and the resultant noise.

The best way to remain disciplined is to think about bad times now, when there aren?t any, and plan how you will act when they surely will come. (Hint, you will not sell but see that everything is on sale and become a bigger buyer.)

Also, you need to think about the boom times, and not be lured into buying more when things are historically expensive or moving away from your asset allocation strategy mix.

The best time to make decisions that are more rational and less subject to biases is when we are not in emotionally charged times like we were in 2008. So plan the next twenty-five years or the number until you retire and plan how you will deal with good times and bad times. Write your thoughts, feelings down.

When the good times or bad times come refer to your written strategy, stay the course, and in the long-run you will be better off. You will make fewer investing mistakes.

Greg ?B. Davies of Barclay?s Wealth actually got me thinking about all of this because of a wonderful presentation he gave on Using Behavioral Finance in Client?s Portfolios?He talked about the zone of anxiety , decision-making, and its emotional context and effect on investor?s portfolios.

This is a must view video and builds on the theme of this post.

As always remember managing your biases, emotions and making fewer mistakes will build a better bottom line in your investing portfolio.

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