Back in the real world

As lawmakers grill Henry Paulson, Ben Bernanke and Christopher Cox, those of us back here on earth are struggling to keep our heads above the fray. With markets gyrating and the economy teetering, it sure is hard to not bury your head and abandon the financial plan that you created. Like almost every tense issue that you confront in life, you need to take a deep breath and remind yourself what you are trying to accomplish.

For most people, the financial planning and wealth management process allows you to articulate your short and long term goals and then develop strategies to help you achieve them. If you have done this, then you probably were able to shield the short-term money from most of the problems that are plaguing the markets right now. After the government insured money market accounts last week, you likely have very little to worry about. With no reason to panic about immediate needs, you may start to feel anxiety about the longer term money.

One woman recently noted that she was simply “not going to open her retirement statement until this is all over.” That’s not exactly the behavior we would recommend. Besides being a bit irresponsible, you may find that if you have here a diversified portfolio that things are not as bad as you thought. This happened just the other day, when I spoke to a client. He said “the stock market is down more than twenty percent and that makes me crazy!” I responded that his portfolio was down only 9%, which is painful, but not fatal to his long-term plans.

With so much negative news swirling, it’s hard not to think that you are going down with the ship. It is completely understandable that every investor wants to participate on the way up and avoid the pain associated with bear markets. Recent research by Prof. Loewenstein and his colleague Duane Seppi found that investors in Scandinavia looked up the value of their holdings 50% to 80% less often during bad markets. As my mother likes to say, “Who needs absolute confirmation of the bad news?” This is born out by experience--according to Vanguard, mutual-fund holders checked their account values far less often in this year’s market tumbles than they did in mid-to-late 2007, when stocks were setting new highs.

OK, let’s assume that you are going to check the accounts because you are (a) guilt-ridden or (b) responsible. Obviously when the market is in free-fall, you are unlikely to feel good about the entire exercise. But here is an excellent coping mechanism: remind yourself that you are in this for the long-term and take a few moments to go back in market history and see how stocks did after other periods of despondency like 2002, 1998, 1991, 1987, 1982, 1974 and so on. If history is any guide, your inclination to act like an ostrich is a strong indication that the market is about to turn into a phoenix.