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Wealth & Well-Being

Why It's Always Better to Prepare For, Rather Than Predict, the Market's Next Moves

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You’ve likely heard some variation of the phrase, “past performance doesn’t guarantee future results.” It’s usually shared as a disclaimer in relation to the markets. Yet, it’s something investors hear so many times that the messaging starts to lose its meaning. Rather than a warning, it sounds more like white noise.

The problem is, when history does repeat itself in the markets, patterns start to emerge, and investors are lulled into a false sense of safety. Consider the 2010s. Prior to March 2020, investors enjoyed the longest-running bull market in history. For over a decade, stocks did great. And while that was good for investor portfolios, it wasn’t quite so good for investor preparedness.

Let’s get into why assumptions and expectations are dangerous for investors, and how to become better prepared for future market changes.

The Problem With Assuming Market Performance

Statistically speaking, it is astronomically safer to ride in an airplane than a car. Yet riding in a car feels so safe because it’s something people do every day all around the world. 

Just because something, like riding a car, feels safe (and even a little boring) doesn’t mean it doesn’t have the potential to cause some damage. It just means that for a while now, things have gone your way, and that’s led you to assume conditions will always be this way. 

But when an ice storm hits or the brakes seize up, the same thing you’ve done every day for years suddenly feels exponentially more dangerous.

Finding success as an investor isn’t about chasing the highest returns and avoiding all losses. It’s about sticking to a long-term plan while preparing for dangers up ahead, even if you can’t quite see them. 

FOMU: Fear of Messing Up

As we talk about preparedness as an investor, it’s worth pausing to talk about the idea of FOMU: fear of messing up. 

The idea of managing finances is overwhelming for a lot of people. One wrong move could lead to costly mistakes or missed opportunities. Rather than address these concerns or make decisions, they freeze up and avoid doing anything altogether. As you can imagine, avoiding difficult decision-making isn’t the best move for an investor’s portfolio. 

The people who feel paralyzed by their FOMU aren’t unaware or uneducated, quite the opposite. They know the decisions they're making are important, and they’re worried about what will happen if they mess up. It is this fear and worry that keep them stuck. 

Overcoming Analysis Paralysis as an Investor

So the big question is, how can investors get past their “analysis paralysis?” Rather than focusing on the future and every possible outcome, start by taking stock of where you are today. Look at how much you have, your current debts, your regular income, and your average spending.

These four pillars will paint a good picture of your current financial standings, so consider them your “starting line.” Now, you need to figure out your finish line.

What do you want to accomplish with your wealth? What are your goals? For many, the “finish line” is to have enough resources to last throughout retirement. But it could also be paying for a grandchild’s college education or wedding, buying a vacation home, starting a business, or a combination of many different goals, whatever it is that will ultimately help you feel fulfilled. 

Now you have your beginning and you have your end, it’s time to fill in the middle—which is something your financial advisor can help plan and guide. Create a flexible plan for chipping away at debt, growing your savings, and building a portfolio that reflects your unique circumstances, capacity for investment risk, and tolerance for risk.

Since this is the part that can really make or break your ability to reach the finish line, building the path forward is what tends to elicit feelings of FOMU. Let’s dig in a little deeper on how to become a more prepared investor to achieve your financial goals.

How Do You Better Prepare?

So how do you come out of a state of complacency as an investor and better prepare your portfolio? By working with a trusted financial partner and stress-testing your financial plan. Consider how your goals and financial priorities may be impacted by varying economic environments. If the markets took a nose dive right before retirement, for example, how would you adjust your portfolio and plans to accommodate?

While stress testing doesn’t completely eliminate the emotional impact of seeing something unexpected happen in the markets (ahem, 2020), it does help relieve some of the anxiety and pressures that come with dealing with the unknown. There’s comfort in knowing your portfolio can weather any storm and that you have a financial guide to help you navigate through it.

Think of it this way: Preparing your portfolio for changing market conditions is like hurricane-proofing a house in Florida. While you hope a hurricane never tracks your direction, it’s naive (and dangerous) to convince yourself it’ll never happen. It’s always better to be prepared to batten down the hatches and never have to than be caught off guard and stuck dealing with the damages.

Our team at Northstar helps investors like you build an all-weather portfolio that’s designed to help you move closer toward your long-term goals, no matter what obstacles lie ahead. While we always enjoy upward momentum in the markets, it’s important to us that our clients are prepared and realistic about what may be coming down the line. If you’d like to learn more about how we can help you and your portfolio feel more prepared, give us a call anytime.

Written by Julie Fortin in collaboration with Lexicon Advisor Marketing

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