The are many ways I measure my success as a wealth manager, but one of the most important ways is how many nervous calls I receive from clients when financial market volatility increases. If I’m doing my job well my clients achieve a certain mindset and comfort level, allowing them to navigate extreme periods of market volatility without being infected by emotion, which leads to poor decisions. Below are my Top 3 ways to achieve this appropriate mindset:
Commit to Financial Goals, Don’t Just Set Them
The beginning of any sound financial plan is the determination of and commitment to goals. Tony Robbins, the famous author and life coach, emphasizes the importance of commitment this way, “If you are just trying and not committing, there’s no promise you will reach your goals. The most successful people are not always the best and brightest, the fastest and strongest. They are the ones with the most commitment.” Tony is exactly right! Commit to goals, have someone help you stay on track to achieve them, and remember it is impossible to determine which direction you need to go unless you have predetermined your final destination (Goals).
Don’t Time Markets, Manage Risk Instead
We have all heard the saying that “Trying to time the stock market is a fool’s errand!” I agree! However, portfolios and risk can be managed in a way that allows for sufficient upside potential in the market, while accounting for and minimizing downside risk. How to achieve this balance? Step #1: Establish financial goals (See #1 Above), Step #2: Position yourself in the most conservative investment position possible, which still allows you to meet your goals. If you cannot figure this positioning out on your own, have someone help you! By managing risk in this way, a portfolio will be aggressive enough to meet goals, but humble enough to withstand, and take advantage of, negative markets with assets not exposed to stock market volatility.
Avoid Comparisons to Benchmarks
As humans, we love to compare ourselves to others as we think it gives us feedback and a sense of self-worth. However, while I find some comparisons useful, I often find them counterproductive as they cause me to lose focus and distract from what I should be focused on. One counterproductive comparison I see is investors constantly comparing their investment portfolio to an index. Why is this comparison counterproductive? It’s counterproductive because the rate of return you need to attain your goals (Again See #1 above) should be your benchmark! There is no investment law requiring your performance keep up with a benchmark. In fact, some common benchmark/ indices including the Dow Jones, the S&P 500, Russell 2000, etc. involve substantial risk, which many are unaware of. If your specific case facts allow for more conservative positioning, why compare yourself to a benchmark that is only going to lure you in to taking too much risk? The answer may be less clear when market momentum is moving upward, but very clear when downside volatility rears its ugly head. Remember: Stay disciplined with your approach/process and you will be rewarded longer term!