It's time to analyze, and come to peace with, the decisions that torpedoed so many portfolios in the last two years.
Rather than have my parenting permit temporarily revoked, I had an epiphany -- I was exhibiting the same behavior I was attempting to prevent. Although I could easily justify my behavior, it would simply be an excuse.
This got me thinking about what most of us are experiencing in our financial planning. Even this strong market rebound has left many of us wondering whether we messed up or missed out. Generally this is not the case. The beauty of hindsight is that it makes each of us an expert. But the problem with hindsight is that it often overlooks the sound decisions that led to our disappointing results.
So realizing that calm stock markets are rarer than Buddha-like teenagers, here are some things to think about:
Forget the past
It's unlikely that we will ever recapture the imagined sports prowess of our youths. We have come to accept that as we grow older, we gain some things and lose others. Yet with money, most of us still fixate on what our portfolios looked like in September 2007. This is problematic at several levels:
•The risk we took to grow our portfolios also caused them to fall. You can't have it both ways.
•The reason you invested was because you were unhappy with your savings or were trying to make more money. I can't imagine anyone thought that stocks could not go down as well as up, considering the market volatility of this decade and the history of the stock market.
•We have a tendency to remember when we have been right. We recall our discomfort with the market at its peak, but we don't have a sense of those other times when we felt uncomfortable but didn't act on it.
One of my favorite books, the Arbinger Institute's "Anatomy of Peace,'' suggests that when we circle back with our friends or advisers and talk about how obvious things were, "we end up gathering with allies -- actual, perceived, or potential -- as a way of feeling justified in our own accusing view of others." Ironically, though, this circle of blame is disempowering. If we don't honestly look at what our role is in a situation, we are destined to repeat it.
Remember the past
This market rebound has left many who had left the market desperate to get back in. The market will eventually be higher than it is today, but no one can say exactly when. This last year makes it critical for you to ask yourself the following questions so that you can learn from them:
•What am I able to handle? The markets go up and down. If you cannot accept volatility, then you should not be invested. No matter what someone's track record or promises, they cannot immunize you from market movement. The trade-off for saving rather than investing is probably (not assuredly) less spending money in the future or smaller gifts to charity or heirs. It also means tighter control on spending today.
•What did I do wrong? This is a complicated question. You may have been appropriately invested and still lost money. The way to approach this question is technical -- was my asset allocation appropriate, did I have good diversification, did I risk what I really could afford to lose -- and emotional -- was my tolerance for risk different from my personal ability to accept it, did I suddenly feel as if I needed to control the somewhat uncontrollable, was I connected to the financial planning strategy?
•What did I do right? Don't confuse bad results with flawed thinking or good results with sound philosophies. Real estate was easy money; oil was going to hit $200 a barrel, and don't-fight-the-Fed were all right -- until they were all wrong. If you use a thoughtful process for making decisions, examine them regularly, and make adjustments where appropriate, you will turn this situation around.
Determine your role
In "Anatomy of Peace" it says, "When something is crooked and we need to make it straight, we call it justifying." If we spend too much time pointing our fingers at others, we are not accepting our own role in the situation. It is easy to look at your partner and say they spend too much, your investment adviser and say they had you invested wrongly, the government and say they're simply throwing away my money, and your kids and say that they don't talk kindly enough to each other. While sometimes it is difficult to accept how much we are responsible for our own lives, it also gives us the opportunity and freedom to change them.
Spend your life wisely.
Ross Levin is the founding principal of Accredited Investors Inc. in Edina. He is a certified financial planner and author of "The Wealth Management Index." His Gains & Losses column appears on the fourth and fifth Sundays of the month. His e-mail is firstname.lastname@example.org.