Summer market mayhem! Now that's entertainment! Some of us would have gone to a suburban big-screen googolplex and paid to watch. But after opening the most recent monthly statements from my asset-dieting RSPs, I haven't been smiling. And I've had to give myself advice about market risk-again.
People's perception of risk gets all out of whack when their world isn't acting the way it should. How do we get off-track? Maybe if you wake up in a sweat at 3 a.m., you shouldn't start fiendishly recalculating how much money you'll need when you retire. We irrationally focus any extreme market trend forward in time, thinking it will last forever. If you can't turn your calculator off, maybe it's time to rethink the problem.
Your first slightly saner thought might be jealously directed toward those people that are lucky enough to have a generous defined benefit pension plan with their employers. Their future income will be looked after. They don't have to worry much about future market slumps that will hammer RSPs.
I tend to rely on the cheap rationality trick, which always calms me down-eventually. First of all, hey, I'm not living penniless in a ditch, and I never will. Second, sometimes panic is an entirely normal and rational reaction. I'm old enough not to listen to some 24-year-old Harvard grad in a TV sound bite telling me not to panic. I hate those twits. Go tell them they'll never work again and they'll have to pay back their student loans in 12 months and see how they react. I know that panic is a survival response. That's why our ancestors weren't eaten by sabre-toothed tigers. The ones who didn't panic didn't make it.
Then I remind myself that I used to be a professional money loser. In the 1980s, I began my career trading stocks and options for a living. My food was what I grabbed-my compensation deal with the firm I worked for was a draw against my future trading profits. I only dreamed of the upside. Then, 20 years ago this month, I was trying to dig myself out of a multimillion-dollar hole.
I turned the October, 1987, crevasse into a hill of savings years ago. My strategy? Solve the following complex equation: Cash In - Cash Out = Savings. If you include a time element in the equation for retirement, it looks like this: Future Savings - Future Spending = Not Living Only On CPP. Notice that crazy market-volatility variable that people were all worked up about this past summer isn't in there? That's because you have a better chance of altering the weather than of influencing markets.
If forcing yourself to be rational isn't working, then maybe having fun by being completely irrational about all future decisions will help you relax. Think of really unorthodox ways to alter the variables affecting your savings and retirement income.
How about shortening your lifespan? Hey, how much money will you need if you're going to croak at 68 instead of 78? Or die before you retire? Smoking is quite relaxing. Overeating is fun. So put on 50 pounds, steer your car with your knees and answer e-mails at the same time. Ride a bike without a helmet at night, without a light, on the wrong side of a divided highway.
What about something even more draconian: actually spending less now? That will leave more money for later. Stop buying Starbucks lattes. Sell your nice car and buy a $100 bicycle that breaks down-you'll be too busy fixing it at night to worry about retirement. Buy cheaper cuts of meat, or why not stop eating completely for a couple of weeks at a time. Bring a renter into your home. Stop giving money to your favourite charity.
You probably won't do any of those things soon, right? Yet most of them are as irrational as worrying about how future panics in financial markets will affect your portfolio.
Here is some good and rational advice: If you have equity investments and this worry thing is really getting to you, take a breather. Think about shifting all your savings into good old Government of Canada treasury bills for six months. Want a little more action? Add some ETFs that track stock market indexes to your portfolio-that will give you market volatility similar to what you had when you were sleeping well before the markets went berserk.
But the best rational advice I can give you is to learn the discipline of setting risk limits and sticking to them. That will allow you to live with any volatility in the markets. It really is that simple. And you can imagine more pleasant things when you hit the beach next summer.
E-mail Doug Steiner about his column