We have all heard the cliché, "Hope is not a plan." Market corrections of 10% or more are never fun, but they do a great job of reminding us of the truth in that common phrase. We all need to remember that market corrections are a natural occurrence that we have to accept if we want to have money invested in the stock market.
With "financial entertainment channels" all focused on ways to increase ratings, maximize viewership and boost advertising revenue, they are working hard to keep us whipped up into an emotional frenzy over what is really normal market activity. They want us to be emotionally pumped up. They want us glued to the screen to see what "big" news might come next. I think history has proven that while mixing pumped up emotions with investment decisions might be great for TV ratings, it is not a recipe for long-term financial success.
When market corrections do occur, they quickly divide all of us into two basic categories: those with a plan and those without. Both groups want answers to the following questions:
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- How bad is this?
- What does this mean for me?
- What is the impact on my investments?
- Does this affect my financial well-being?
- What should I do?
While these are all important questions to consider, the most important question to ask yourself is this:
How can you possibly answer any of the five question listed above without a financial plan in place?
The advantage of having a financial plan in place is that you can pause and take a systematic look at what a correction really means for you. It provides a framework that allows you to assess current market conditions within the context of your goals and helps put everything into a more personal context. Doing this will likely offer some peace of mind and hopefully prevent any panicked emotional decisions. Having a plan does not immunize you from market corrections, but it can help you avoid emotional responses and give you a way to make informed decisions about how to react.
The next time we experience any kind of market correction, I encourage everyone to slow down, keep things in perspective and try to understand what current market activity, positive or negative, really means for you. Of course, having a plan will help.
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