I’m not going to tell you that achieving your financial goals is easy. It takes careful planning, good judgment, a resilient demeanor, and maybe a bit of luck. But one of the keys, in my opinion, is simply to avoid making mistakes. You have to be more right than wrong.
A great example of how bad judgment can hurt you is what happened to the Standard & Poor’s 500 Index less than a year ago. At one point, the index was down roughly thirty percent.
As a result, many financial advisors were fielding calls from their clients asking if they should cash in their investments before they lost everything. After all, they apparently thought, saving something is better than losing everything.
Without getting technical, 2020 was the first time that the S&P Index ever went from a negative thirty percent to ending the year in positive territory. In fact, it ended up with a double-digit return.
That’s an incredible swing in a short period of time. It took only a few months for the Index to transform panic into a successful year of investing. Those that panicked will likely take years just to get back to where they were when their panic hit.
Naturally, the Index is just that, an index of stocks. In all likelihood, most portfolios are not comprised of just stocks, let alone S&P Index stocks. But the message is clear: Long-term investors need to understand that, over time, there are peaks and valleys.
Goals need to be established and periodically reviewed and modified. But not needlessly abandoned. Panic is not a strategy that will likely lead to financial success.
I’d like to share some things I learned from a recent survey in the well-respected Investors Business Daily. Without a doubt, the pandemic has had an impact on many people’s financial issues and concerns. The survey indicated that fifty-one percent will make a New Year’s resolution involving money. That’s up from forty seven percent last year. Naturally, I’d like to see that number closer to 100 percent.
The top priority in the survey was to reduce debt. Even with today’s low interest rates, getting in over your head is dangerously easy to do. I’m concerned that, in the not too distant future, there could be a wave of evictions and defaults on mortgage, student, credit card and auto loans.
When you borrow money, the hard reality is that it needs to be paid back. Understanding loans and loan interest is a key reason why financial education is so important. Car loans are an excellent example.
Every time I see an auto advertisement that increases the payment period to keep the monthly payment lower, I worry. It’s easy to get into a situation where you owe far more than the vehicle is worth.
Other top priorities highlighted in the survey included raising credit scores and increasing personal savings. Both admirable goals, especially improving credit scores because there are far more financial transactions done with credit cards than with actual cash.
As for saving, I’ve encouraged it for my entire career. If there were ever a poster child as to why emergency funds are so important, just think 2020. And always think with a level head before you make financial decisions.