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The Sky is Falling

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By jackcrow
August 30, 2006

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The Sky is Falling. . .

at least according to many talking heads. On the boards that I follow there is a growing number of posts concerned with the negative, the current negative and the future negative. This is a good thing, we need to be aware that economies and markets have rough spots. What we can't afford to do is let these potential negatives rule us and our portfolios, that is a recipe for disaster. Letting today's editorial headlines influence us leaves us in reactionary mode which is often too little too late. We get caught managing by emotion which is very dangerous to out long term future.

What do we do to minimize how much a economic forecast or a new bit of economic datum effects us? The best answer is to have a good, comprehensive, long range investing plan. All the squawking going on in today's financial media makes for a perfect atmosphere to create an investing plan. Planning for the worst is the best place to start. Most of the websites you'll visit that help you create your investing plan for the best because its in their best interest. Most of the websites that offer assistance sell investment products and, surprise, they want you to buy their stuff.

Mutual funds usually show you how important it is to be "fully invested" because if you miss out on the best 10 days of the year your return stinks. They aren't wrong but this bit of data also fits their need to keep people from trading in and out of their fund(s). Its in their best interest to have people DCA in and out. Stock brokers on the other hand love traders, they want you to trade. Every time you trade they hear the cash register ring up. So it no surprise that their helpful tips encourage to buy low and sell high. Follow their rating system and you'll make money. Their rating system may be back tested to make money for the investors that use it but I know that the broker is going to make money if you use it. Both of these industry folks are going to show just how much your $10,000 will grow (some disclosure in fine print included)

It is in our best interest to develop our plan based on the economy getting ugly and the market getting ugly. It is far more important to me to know what is going to happen to my $10k if things smell like the porta-potties after a Toby Keith concert then Martha Stewart's garden in the late spring. The historical returns of the market are an interesting bit of data but I doubt that is what my returns will look like. Tomorrow is a different day.

So how do we pull this off? We start with our future financial needs and work backwards. How much do I need for __________________(fill in the blank)? How long do I have to raise that money? We do this for all our major financial goals. We gather up all of these and prioritize them. Now we know where we want to go. We then take a good honest look at where we are today. Once we know where we are and where we want to go we can map a course to get there. This is where the sky is falling folks are really helpful. They are shouting from the rooftops that they way ahead is nasty, a useful piece of information. We now build a plan that is built to navigate nasty waters and brutal terrain. We need to be thinking more like William Clark then Clark Griswold.

Historical returns are nice but what if we don't get them? Average historical inflation is a nice bit of information but what if our decades are at the high end? What happens if the dollar descends, fuel and food prices rise? What happens if medical cost continue to rise faster then headline inflation? What happens if Social Security benefits get cut in half? What does my defined pension plan look like if the government has to pay for it not the company that promised it? What happens if, um if, um, wait I need more sky is falling headlines.

If we build a plan that has taken seriously the possibility of the bad or even the worst then the sky is falling headlines don't bother us much. We can skim the article to see if there is something that we missed or an investment idea that fits our plan. Emotions will no longer run our financial decisions because our plan has already mapped a course through the messy and the ugly. I don't know about you but I would rather wake up and be surprised by the upside of my portfolio then by some negative news that just set me back 5 years. The over all concept is pretty straight forward. Plan well for the downside and the upside will take care of itself.


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