During Market Turmoil, Just Listen to Your Financial Plan

Every year, right around this time, all the big brokerage firms, economists and banks come out with projections of what’s supposed to happen next in the financial world. This year is no exception. Especially prominent in the news has been the Royal Bank of Scotland warning, in no uncertain terms, that people should “sell everything” and prepare for a “fairly cataclysmic year ahead.”

You hear something like this from RBS, and it’s so clear, right? “Sell everything.” “Cataclysmic year.” Those aren’t vague terms. If you’re a normal human being, hearing news like this is disconcerting. A pit forms in your stomach, and you don’t know what to do. You certainly feel like you should be doing something, but what?

Fast-forward a few days. You’re thinking it over, trying to decide what to do, and you tune into the news again to see what RBS is suggesting. But you don’t hear from RBS. Instead, you get an update from Goldman Sachs. Goldman Sachs — and they’re smart too — reports that they see an 11 percent upside in the “S.&P. 500 after an ‘emotional’ sell-off.”

“Whipsawed” is the only word I can come up with to describe this feeling. One day you’re told to sell everything, the next you’re supposed to buy because the market is 11 percent undervalued. What are we left to do?

Do we listen to RBS or Goldman Sachs? Or both? Or neither?

There are many reasons having a financial plan is valuable, but maybe the most significant is that it can help you understand how to react to this kind of news. As a quick reminder, when I say financial plan, what I mean is that you have clearly articulated your values. You’ve taken a guess at your goals, and you’ve built a reasonable plan to get there. Out of that process should naturally flow an investment plan, which will explain how you divide your money between stocks, bonds and cash in order to give you the greatest likelihood of meeting your goals.

Any well-designed financial plan will consider two important realities. First, the market will go up and down, sometimes a lot. Second, we don’t know when the market is going to go up or down, and neither does Goldman or RBS. Any attempt to guess and trade accordingly amounts to something known as market timing. And that unfortunately, is a fool’s errand. Few people have the skill (or is it luck?) to guess right repeatedly, fewer still can predict who the good guessers will be anyway.

So Instead of trying to time the market based on someone’s forecast, why not use your financial plan as a touchstone? Every time you’re tempted to follow the advice of someone who sounds really smart, go back to your plan.

Remind yourself that it takes into account the fact that the markets are going to go up and down. It reflects some reasonable assumptions about how markets are going to behave. But, perhaps most important, your financial plan is built upon the understanding that there are going to be good years and bad years, and that nobody can predict what kind of year the coming one will be.

By having (and using) your financial plan, you get to let go of all the anxiety that can come from listening to these forecasts. Sure, you can listen to them if you want. But tune in for entertainment, instead of advice. Think of these forecasters like circus clowns. They are perfectly harmless over in the corner trying to attract attention, juggling flaming bowling pins. As long as you don’t try to join them, you won’t get burned when the pins drop. Just keep a safe distance, and enjoy the show.

This commentary originally appeared January 25 on NYTimes.com

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© 2016, The BAM ALLIANCE

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Carl Richards, CFP®

Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. Carl has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, "The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money."

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