Investing Doesn’t Have To Be So Scary

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Boo!

Whether you prefer jump scares, bloody zombies, or simply a cute dog in a ghost costume, Halloween is all about kicking back and having a little fun with fear.  But while watching a good horror flick with a bag of candy may indeed be a good time, the adrenaline may not necessarily wear off so quickly if you’ve been watching the increasing volatility of the markets lately.

Wanna see something really scary? 

Here’s a chart of the S&P500 over the past three months (courtesy of Yahoo finance).  Take a look at the overall 10% drop in October.

 

October-18

 

Spooked yet?  In the spirit of the season, let me add my own terrifying chart to the mix.  Here’s every inflation-adjusted compound drawdown for the S&P500 since 1970.  Parental discretion is advised.

 

S&P500-Drawdowns

 

Talk about a bloody mess!  In terms of Halloween frights, a meager 10% drawdown is kinda like a little kid in a vampire outfit while stock investors should more properly be prepared for a masked serial killer with a chainsaw who wants to paint the walls red with your life savings.

So with recent trends looking pretty spooky, historical reality proving downright terrifying, and the financial media pushing story after story of impending financial doom, is living in a state of perpetual fear just a fact of life for investors?  Absolutely not!

Let’s get right down to it — investing doesn’t have to be scary.  In fact, wise financial management is not supposed to be that way at all.  So stop being motivated by fear and start taking charge of your financial destiny.  Avoiding hair-raising market turmoil is well within your control, and you don’t even need to keep up with the markets to avoid the dreaded unexpected disaster lurking around every corner.  The trick is to stop thinking only about the stock market and start thinking about proper asset allocation.

How does asset allocation eliminate investing fear?  Simply put, a well-diversified portfolio automatically manages risk and adjusts to market conditions so you don’t have to.  This site is full of examples of how that works, but for a quick math-free summary let’s compare the above drawdowns visual to the same chart for a few intelligently constructed portfolios.

 

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Now that’s more like it.  You can tell the kids it’s safe to open their eyes now.

I’ve always found it interesting how much of the investing world is built on fear.  I get that the pundits stoke it to sell a product (their expertise), but I’ve noticed that even some level-headed investors have developed a fear fetish over the years where they embrace the pain and have convinced themselves that very volatile stock-heavy portfolios are the only way to meet their long-term financial needs.  Well I’m here to tell you that it’s not that simple and there’s a better way.  By learning the value of proper asset allocation, one can earn wonderful returns competitive with even very risky stock-heavy portfolios but with a fraction of the associated fear of market turmoil.  All you have to do is to seek out the knowledge required to succeed.

So as you prepare your costume for an evening of fun, look at the mask you’re putting on.  Think about what it means to dress as someone you’re not, and vow to NOT do the same thing with your investments.  Know yourself.  Don’t invest in something that frightens you.  Find a portfolio suitable for both your financial and emotional needs, turn off the glowing box broadcasting financial horror stories, and go on with your life as a happy and productive human being free of financial anxiety, doubt, and regret.

A little fear may be enjoyable for a night but it is no way to manage your finances.  So go out and have fun, but consider sitting down with a handful of candy tomorrow and taking some time to research how you might invest as happily and fruitfully as possible.

Happy Halloween!