Over the last few months, the stock market has proven yet again it is no place for sissies. Huge drops in the Dow Jones average one day (over 1,100 points in a single session last week!), followed by encouraging partial recovery, only to be dashed by another fear-induced sell-off, makes for an emotional roller coaster. What will the Fed do about interest rates? What happens to the price of oil? Who can do something about inflation? Will the supply chain problem ever be corrected?
The war in Ukraine drags on, with millions of its citizens displaced and thousands killed. Putin doesn’t know how to quit without putting control of his country in serious jeopardy. The underdog lives to fight another day, but the outcome is pure speculation. The world economy is in a tizzy, and Europe trying to make do without Russian oil, gas, and wheat. NATO might gain new members, but only if Turkey allows it.
China has become the financial equivalent of jello: a seemingly solid mass that quivers and shakes with each new move by its government to hold things together. Covid is back, resulting in millions back into lockdown.
The bottom line is financial headaches, real or imagined, for nearly all of us. Even if you don’t have much skin in what happens on Wall Street, we are all affected by what happens worldwide. It is absolutely true that if one developed country sneezes, we all worry about catching a cold.
So, what does all this mean for the concept of planning for retirement financial security? If you are retired, close to leaving the workforce, or even just thinking about the time when you will be freer to live your dreams, what are you supposed to do when the Dow drops 1,000, you can’t afford your dream home, or China, the world’s second-largest economy, starts to slow down?
Do you rejoice when gas prices drop or realize that it is likely a temporary blip Prices around $5 a gallon may be the new norm for quite a while. ? What about the West’s drought…how will that affect food prices and life for the 40 million people who depend on the Colorado River to keep flowing?? Lake Mead and Lake Powell are draining faster than a toddler’s bathtub.
As regular readers know, I am a non-financial blogger. I still managed to retire at 52 by following a simple rule: spend less than I made. I have had a few financial advisers over the years. Generally speaking, they have been positives for me.
Yes, some of their recommendations were poor (think Greek banks in 2012), and I lost money. Since the financial markets are not logical and are subject to seemingly counterintuitive moves, I know losing is part of the process. As long as the growth exceeds the decline by a decent percentage, I am happy.
So, what is financial security, and how do you achieve it? I suggest there are three parts to the answer:
1. Knowledge. I don’t mean understanding derivatives, swaps, or other esoteric financial tactics that helped launch the 2008 meltdown. Obviously, many professionals didn’t understand what they were buying either. I mean knowledge about your goals, the actual state of your financial health, and the amount of risk and uncertainty you are willing to tolerate. Self-knowledge is key. Without it, your future is at the mercy of others.
2. Patience. This is a tough one in a culture that literally screams at us, “buy now and buy often.” Saving for something and delayed gratification is not part of our collective mindset. An article in the paper last weekend recounted the trend of those under 35 giving up on saving for retirement. After two years of Covid, these folks have decided that planning for an unknown future is silly. Enjoy life while you can before another …whatever…knocks us on our rears again.
Even if we have little or nothing invested in stocks, when the market falls, we react in precisely the wrong way by allowing panic or fear to dictate how we manage our financial assets. When housing prices begin to skyrocket like they have been for the last few years, we decide to sell our homes so we don’t miss out on the rising tide – completely forgetting that the house we are moving to is also hugely more expensive.
Patience is a winning strategy in much of life, particularly in financial matters. The hare lives up to 10 years. The tortoise is closer to 150 years. There is a reason he eventually wins the race.
3. Attitude. This is the belief that you have successfully prepared for your retirement. Life may make that difficult, but without an attitude that the problems can be overcome or worked to your advantage, severe damage will have been done to your long-term success. This isn’t just positive thinking. Instead, the proper attitude allows you to make appropriate decisions, execute your plan, and adjust your goals. I know that the losses my investment account is showing are only real if I liquidate now. My attitude is they are paper losses, I will not deviate from my plan.
Financial security does require some money. It does require being smart with your investments. It does require a certain level of resources, though that level is different for each of us. That is the reality.
But, I contend that the mental part of the equation is as important. With self-knowledge, patience, and the right attitude, your financial security is not just what is in the bank or the broker’s, but what is in your mind.
And, unlike a stock market that runs more on emotion than logic, I find it quite comforting that the mental part of financial security is 100% under my control.
I find that quite satisfying.