Be patient and let it simmer!
You’ve probably heard of many creative analogies to describe the value of preparing for your retirement by making the right long term investments today. But I’m willing to bet that comparing your long-term financial planning to cooking a turkey is a new one. It’s likely a new, potentially scrumptious, and somewhat intriguing analogy to describe how to make smart investments.
Now that I’ve basted your interest and got the wheels in motion, allow me to describe in greater detail what this analogy means. I want to help you understand why long term investment planning is not only a necessity, but how you can take steps to avoid opening the oven too early.
Long term investments require playing the long game
Let’s take a look backwards at historic events over the last 90 odd years. During that time, in the United States alone, the nation has experienced 10 separate bear markets. A bear market is described as a general decline in the stock market of 20% or more from the recent peak. It typically follows a period of strong investor confidence that’s later eroded by fear and uncertainty.
In contrast, we have the bull market when prices are on the rise or are expected to rise. It’s a term mostly associated with the stock market, but it can also refer to changes in bonds, currencies, commodities, and even real estate.
There have also been 15 recorded recessions and depressions across the US over the last several decades. The 1929 stock market crash paved the way to the most severe of depressions that saddled the nation with low growth and few prospects throughout the 1930s. The 2008 collapse of Lehman Brothers triggered “The Great Recession” that shook the entire global economy. More recently, the COVID-19 pandemic caused an economic slowdown that had investors fearful of another Great Recession, if not a repeat of the 1930s.
The US has also participated in, and often led the world in combating:
- The Korean War
- The Vietnam War
- The war in Afghanistan
- The war in Iraq
- A number of other international conflicts
How does this all relate to your long term investment plans?
Each one of these incidents, financial and geopolitical, all had an impact on market performance. In the short-term, there are always sell-offs in stocks, bonds, mutual funds, and other investments out of fear for the unknown.
However, markets have shown a remarkable ability to reward patient long term investors who stay invested. In fact, if you really want to demonstrate patience with your investments, you should follow the lead of the Wright brothers and Warren Buffett.
“The stock market is a device for transferring money from the impatient to the patient.”
- Warren Buffett
Long term investments are like cooking Thanksgiving turkey
We must keep the long-term horizon in perspective when judging the success of our portfolio and the financial plan it supports. It’s like cooking a turkey for Thanksgiving, and this is where we’ll get very creative in describing successful long term financial planning.
Suppose you’re cooking a 20 pound turkey for the holidays. It takes, on average, up to four or five hours to fully cook. We don’t judge success or measure progress by opening up the oven every few minutes to check on how things are going. Instead, we give the oven time to do its work. We only check periodically to see that everything is on track. If the bird is not cooking as it should, we make the necessary adjustments to get it the rest of the way.
The same approach should be taken with your investment portfolio. If you keep interfering with the process, your money will never achieve the returns you need for your retirement. That defeats the whole purpose of making those investments in the first place. You’ve built an investment plan for a reason; now you need the patience to stick with it.
Judge the success of your investments based on your goals
When it comes to your portfolio, don’t judge success by monthly, quarterly, or even annual statements. Instead, judge how your portfolio is making progress towards your long term investment goals. Analyze how any changes in your life might impact your goals, and only then should you make adjustments to your financial plan.
This helps you to stay focused on what you need to do to save for a potential decades long retirement. You’ll also avoid letting any short-term market fluctuations compromise your long term success. And make no mistake; there will be more bear markets and recessions between now and the time you officially retire. Patience is a virtue but if you can master it, you’ll build the retirement portfolio you need to live a comfortable life when you leave the workforce behind.
Trust the process and your plan. And don’t open the oven all the time.
This is why you need to work with an experienced advisor. You need someone to help you keep your costs and your emotions under control. It is worth it many times over.
It pays to start early when saving for retirement. If you do, you’ll have enough money for everything you need for as long as you live.