By Bob Lowry
Over the last few weeks the stock market has proven yet again it is no place for sissies. Huge drops in the Dow Jones average one day, followed by an encouraging partial recovery, only to be dashed by another fear-induced sell off makes for an emotional roller coaster. What will the Fed do about interest rates? What happened to the price of oil?
China has become the financial equivalent of jello: a seemingly solid mass that quivers and shakes with each new move by their government to hold things together. And, don’t even get me started on Greece.
The bottom line is a financial headache for nearly all of us. Even if you don’t have much skin in what happens on Wall Street, we are all affected by what happens there and around the world. It is absolutely true that if one developed country sneezes, we all worry about catching a cold.
So, what does all this mean for the concept of financial security? If you are retired, close to leaving the work force, or even just thinking about the time when you will be freer to live your dreams, what are you supposed to do when the Dow drops 1,000 in 10 minutes, or China, the world’s second largest economy, starts to slow down? Do you rejoice when gas prices are dropping again, or realize that means bad things for whole industries? What about the California drought…how will that affect food prices this winter?
As regular readers know, I am a non-financial blogger. I still managed to retire at 52 by following a simple rule: spend less than I made. I have had a few financial advisors over the years. Generally speaking, they have been positives for me. Yes, some of their recommendations were poor (think Greek banks in 2012) and I lost money. Since the financial markets are not very logical and are subject to seemingly counter intuitive moves, I know losing is part of the process. As long as the growth exceeds the decline by a decent percentage, I am happy.
So, what is financial security and how do you achieve it? I suggest there are three parts to the answer:
1. Knowledge. I don’t mean understanding derivatives, swaps, or other esoteric financial tactics that helped launch the 2008 meltdown. Obviously, many of the professionals didn’t understand what they were buying either. I mean knowledge about your goals, the true state of your financial health, and the amount of risk and uncertainty you are willing to tolerate. Self-knowledge is a key. Without it your future is at the mercy of others.
2. Patience. This is a tough one in a culture that literally screams at us, “buy now and buy often.” Saving for something and delayed gratification are just not part of our collective mindset. When the stock market falls we react in precisely the wrong way, by allowing panic or fear to dictate how we manage our financial assets. When housing prices begin to increase we decide to sell our home so we don’t miss out on the rising tide – completely forgetting that the house we are moving to is also more expensive.
Patience is a winning strategy in much of life, but particularly in financial matters. The hare lives up to 10 years. The tortoise closer to 150 years. There is a reason he eventually wins the race.
3. Attitude. This is the belief that you will succeed in preparing adequately for your retirement. Life may make that difficult, but without an attitude that the problems can be overcome or worked to your advantage, serious damage will have been done to your long term success. This isn’t just positive thinking. Rather, the proper attitude allows you to make proper decisions, execute your plan, and adjust your goals as need be.
The title of this post is a little flippant. Certainly financial security does require money. It does require being smart with your investments. It does require a certain level of resources, though for each of us that level is different. That is the reality.
But, I contend that the mental part of the equation is every bit as important. With self knowledge, patience, and the right attitude your financial security is not just what is in the bank, but what is in your mind.
And, unlike a stock market that runs more on emotion than logic, I find it quite comforting that the mental part of financial security is 100% under my control.
I find that quite satisfying.