The world economy is having its worst financial crisis in decades. The stock market has dropped by over 30% from its peak. Several major banks have failed. Many people are worried.
At times like this having a long-term plan is more important than ever. If you don’t you are likely to be swept up by the emotions of the moment and make decisions that will hurt you in the long-run. Making decisions under stress causes us to go into “fight or flight mode.” When we are in this mode, all of our higher reasoning ability is shut down in order to make sure we can escape from the imminent danger. Unfortunately for our brains a financial crisis is not the same as being chased by a tiger and responding to it instinctively vs. using our higher reasoning ability often leads to a poor long-term outcome.
Below is a logically true statement that goes against emotional sentiment:
- What ever happens in the future now is a better time to buy stocks than in Oct 2007.
The statement is true because on average stocks are more than 30% cheaper than they were in Oct 2007. Even if the market declines more someone who buys today will be better off than someone who bought in Oct 2007.
However, stocks were selling like the proverbial hotcakes in 2007 and now it’s hard to give them away. Why?
Our emotions tell us that the recent past always predicts the future, even though intellectually we know that is incorrect. In 2007 with the market reaching new highs we felt that it could only go up, and now with the financial crisis we feel it can only go down.
Having a long-term plan allows you to weather the financial and emotional storms and make better decisions for your future. Not having a plan could allow you succumb to emotions and make investment decisions on the “Sell-Low, Buy-High” philosophy which never works.