Ross Levin is a certified financial planner and president Accredited Investors Inc., a fee-only wealth management firm. One of the nation's top financial planners (so say Money Magazine, Wealth, Financial Planning Magazine,. Investment Advisor Magazine, and others) his latest book is Spend Your Life Wisely: The Deeper Meaning of Money
Ross Levin: The anniversary of the Flash Crash is horrifying to me not because any of our clients were impacted by it, but because it reminds me of our eighteen year-old twin daughters, soon to head off to college and their inevitable flash crashes. The lessons that they have taught me as it relates to handling swift, unexpected, and seemingly uncontrollable reactions have sound application in finance. Here are some things to ponder.
**What are you trying to accomplish? ** When chaos rears its head, it is important to not get drawn into the anxiety it causes, but rather to remember what our purpose is.
With our daughters, it is to help them develop their skills when they go out on their own.
With investing, it is to ultimately create a pool of assets from which you will ultimately spend or give away. The Flash Crash affected day traders who evaluate success by the moment. That's not a game in which most of us should participate. Instead, we need to have our dollars diversified among large stocks, small stocks, international stocks, bonds and cash, and use volatility as a time to rebalance back to our predetermined targets in each of these areas.
**This too shall pass. **Our daughters tend to get over their flash crashes much more quickly than my wife and I get over them, even though we know that they are reacting to something that is ephemeral.
Markets work the same way. Over long periods of time, stocks as a whole are pretty predictable because they are a reflection of things like earnings, dividends, and inflation. Over short time periods, though, they are as dramatic as teenagers. The trick to managing your portfolio is managing your emotions about your portfolio. The best way of doing this is by making sure that you have set aside money that you intend to spend over the next three years in cash, and then let the rest of the portfolio stay invested according to those aforementioned targets.
**Okay, I blew it. Now what? ** Sometimes we can get drawn into the drama and we end up prolonging it.
If you have had a profile of panic, and the flash crash didn't impact you because you sold stocks at the market bottom in March of '09 and have been forlornly looking for a time to get back in, here is what to do. Determine how much of your investments that you want to have in stocks and divide that number by twelve. Every month, on the same day, move that piece into your diversified portfolio. If the market falls by three percent, add the last month's amount to this month's amount.
This helps insulate you from two things:
1) The feeling of regret because the market tanks right when you finally have the gumption to invest again; or,
2) The market doesn't fall apart and you are never able to put your money to work.
Long-term investing and raising daughters may both at times give you heartache, but the rewards are well worth it.