Boxer Mike Tyson was a terror in the ring. He won over 85% of his fights by knocking out his opponent. His ferocious nature intimidated those he fought and they in turn, tried to devise a strategy to defeat him. He famously said of these plans, “everyone has a plan until they get punched in the mouth.” But Tyson was not invincible, he lost some fights. There were boxers whose plan succeeded, even after getting punched in the mouth. When financial markets are going up steadily, most investors are pleased, sometimes giddy. But in instances when the market crashes, such as, the dot-com bubble in 2000-2002, the housing crisis in 2008, and the Covid crisis of 2020, investors feel like they have been punched in the mouth. It is in these moments that having a plan in place becomes most valuable. Markets are always moving up or down, but a good plan is an anchor that ignores today’s prevailing sentiment in favor of a thoughtful long-range objective.
Before a plan takes shape there should be multiple conversations between client and advisor. These discussions involve goals, priorities, values, resources, temperament, and timing. An advisor will ask about all these areas and many more with the goal of fully understanding the client’s financial objectives. With this information the advisor can put together a plan tailored to the client. This plan will take into account the ups and downs of the market and changes in the client’s life situation. Adjustments to the plan can be made as life and market situations change.
But without a plan, the competing emotions of greed and fear take over, greed when the market is going up and fear when the market is going down. An increasing stock market often causes investors to take risks that are not prudent. That punch in the mouth, whether it be financial, a life situation, or a combination of the two, typically brings on fear. Before I became an advisor with JGUA I worked for a Mutual Fund company. During the Covid crisis the market dropped significantly. I talked to several clients who, out of fear, moved all their money from stocks to cash. This was their punch in the mouth. When the market recovered, they had locked in their losses and did not benefit when the market rebounded. A well-formed financial plan helps people avoid these extremes, regardless of what the market does.