Don’t Let Your Best Thinking Derail Your Retirement Dreams

The stock market did great last year.  The Dow was up 13.4%; the S&P gained 9.5%; and the Nasdaq was up 7.5%,  according to CNN Money.

But do you remember how things started?

2016 began with the worst five-day start to a year ever.   It was scary. The Dow dived 1,079 points in the first week of 2016 and it wasn't till March that things began to calm down.

In an effort to help my clients manage these turbulent times, I encouraged all of them to come see me for special meetings to discuss the market, their investments and goals.   I wanted to share some images and information that I thought would provide context to what was happening and hopefully ease their fears.

The meetings were a success. We were able to continue our investment programs and financial plans with renewed confidence in spite of the continuing market volatility .

There was, however, one exception to my successful "volatile market outreach program." For purposes of this article we will call him Frank.

Frank didn't accept my invitation for a special meeting.   He instead sent me an email instructing me to cancel his automatic investment program.

Several years before, Frank and I had determined that if he was to retire at the age he wanted , he would need to invest an extra $500 every month. We decided that the best way to make this happen was to set up an automatic debit from his checking account every month with the proceeds being directly invested into his Individual Retirement Account (IRA).

When I spoke with him on the phone, he told me he had no choice. He had to cancel the automatic investment because he was too close to retirement and couldn't afford to lose any more money.

I told Frank that I thought he was making a mistake.   I encouraged him to come see me but Frank told me he wasn't interested. He didn't have time.

Although I did my best to convince him that stopping the automatic investment was a mistake, I was overruled and it was canceled.

Now that some time has passed, it is apparent to everyone that although the market did go down, it recovered relatively quickly and canceling the automatic investment was not in Frank's best interest.

But that is not the point.

There are two bigger other issues that I'd like to address. The first issue was that Frank was making decisions based on fear and that is never good idea. I think we can all agree, that we do not make our best decisions when we are agitated or fearful.

But the bigger issue I want to make is that Frank was also making decisions based on beliefs he thought were true but were in fact false.

Let me show you what I mean.

Frank believed that adding money to his IRA while the market was declining was a mistake.   He felt that doing so would move him farther away from his retirement goals. He also thought that these negative consequences would be compounded because he was close to retirement.

But Frank was wrong.

What Frank didn't realize, was that the decline he was afraid of, could actually have been a great windfall for him.   In fact, because he was so close to retirement, it could have been an especially good opportunity to improve his situation before retiring.

How could this be possible, you might wonder?   It has to do with a principle called dollar cost averaging (DCA).

DCA is an investment technique where you buy a fixed dollar amount of a particular investment on a regular schedule regardless of the share price.

The result is that an investor will buy more shares when prices are low and fewer shares when prices are high.   And isn't this exactly what smart investors want to do?

DCA also lowers the average cost per share over time, which increases the opportunity for profits. This is another goal of a successful investor.   (For more information on DCA click here.)

No matter how the stock market performed last year, up, down or sideways, had Frank continued to put $500 per month into his IRA, he would have accumulated more shares and moved closer to his goal.*

But if the market had actually gone down, as he feared, he would have accumulated many more shares than if the market had gone up and he would have been far better off.

For someone nearing retirement, these sorts of downturns shouldn't be feared , rather they are better seen as buying opportunities. A big decline last year, would have been a great time for Frank to increase his retirement savings.

Unfortunately for Frank, he made different decisions. He abandoned his retirement plan, canceled his automatic investing, and made it much less likely that he will be able to retire when he wants with the income he needs.

Don't be like Frank.

If you're felling uneasy because the markets are gyrating or for any other reason, be sure to have a conversation with your financial advisor.   While no one should take risks they are not comfortable with, a conversation with a trusted advisor may help uncover opportunities. Make sure you get the benefit of their knowledge and experience so you can keep on moving closer to your retirement dreams .