This Year – Next Year
Happy New Year! While the Earth is about to complete another orbit of the Sun, does this have any particular meaning for your financial life? Probably not.
The clamor and chatter about the calendar year can distract you from your long-term financial purpose and goals. A year is a measurement of time but isn’t important otherwise.
Investors who focus on calendar years often miss the bigger picture. Single-year returns for the S&P 500 have been as high as + 54% or as low as – 43%. Since 1926 there are only a half-dozen years where the one-year returns were within 2% of the long-term average of 10%.
One reason many investors fixate on individual years is that financial forecasts are typically for a single year. Never mind that economic forecasts are notoriously unreliable – they’re still believed by many.
HOW TO MOVE FROM CALENDAR YEAR TO INVESTING LIFETIME
You accomplish long-term financial goals by consistently saving and investing. Concentrating on a single year, good or bad, activates your emotions and interferes with good quality decisions. Your investing lifetime, not one year, is what truly matters.
A calendar year is like a single grape within a bag of grapes. The multiple clusters of grapes are like your long-term goals while the individual grapes represent a particular year. Some of the single grapes are big, some small. Overall, this isn’t meaningful.
Your long-term goals are like grapes – they are made up of clusters or bunches of individual pieces. Just because you focus on the long run doesn’t mean you won’t experience the emotional peaks and valleys that happen in the short run.
By thinking long-term, you have the benefit of flexibility. A single year, 12 months has a discrete start and finish – long-term for you might be a couple of decades or longer. Thinking long-term allows you to absorb inevitable volatility and adjust when needed without overreacting.
WHY TIME AND COMPOUNDING CREATE FINANCIAL MAGIC
Avoiding the year-by-year parade allows you to filter out a lot of noise. Financial markets are very noisy in the short term and this noise makes it hard to stay oriented toward your most important goals.
Instead of worrying about the daily financial news, think about how you can get to the other side of some longer-term problem. Are there lessons you can learn from previous experiences that apply to a current problem?
Having a long-term focus allows you to open the door to the most magical element of finance – compounding. Time is the critical ingredient.
Enjoy the end of one year and the beginning of another. Don’t let all the merriment distract you from your longer-term aspirations. Start there. Ready for a real conversation?