Ever feel like you need a cheat sheet for successful money management? Well, Certified Financial Planner Anthony Isola is happy to give you a peek at his. He fit everything you need to know about investing through bumpy markets on one index card—then his firm for all the Twitterverse to copy.
Because, as investing guru Warren Buffett once put it: “Investing is simple, but it’s not easy.” That’s to say, you don’t need a database of information on hand to succeed as an investor.
Plus, this isn’t the first time someone’s squeezed all you need to know about money onto an index card: University of Chicago social scientist Harold Pollack, after discussing financial matters with personal finance expert Helaine Olen, summed up all the financial advice you’ll ever need in a handy note.
Still, as little as we really need to know to succeed financially, we still grapple with the subject. That’s because we’re hard-wired to buck what’s best for us. “It’s all about controlling your behavior, and that’s hard to do,” Isola says. “Maybe having this card on hand next time the market does what it does can be a good reminder to not panic.”
Just the facts:
1. The market has gone up more than it’s gone down.
Markets have risen the majority of the time, despite big losses that typically occur throughout the year. According to J.P. Morgan, intra-year drops average 13.8 percent, but annual returns have wound up positive in 29 of the past 38 years (or 76.3 percent).
When we’re slogging through the down days, it’s easy to forget this fact. “But the bottom line is: This is completely normal,” Isola says. “The whole motivation [for creating and sharing this index card] was to put things in perspective.”
2. Every downturn has been followed by an upturn.
Isola points out that daily losses of 2 percent or more happen more than five times a year, on average, but the market has bounced back every time. In fact, six months after a 4-percent drop in Standard & Poor’s 500-stock index, the index winds up higher 63 percent of the time, according to the WSJ Market Data Group.
Even far bigger drops have historically been followed by ever higher heights. All eight bear markets (drops of at least 20 percent) since 1926 counted by First Trust Advisors are sandwiched between bull markets. The bears, on average, have lasted 1.4 years and lost 41 percent while the bulls, on average, have lasted nine years and gained 480 percent.
3. Never make important decisions based on emotions.
In the face of falling markets, you might feel an urge to flee. But panic-selling can hurt you in the long run. If you sell when stock prices fall, for example, you lock in losses, then may end up paying more to get back into the market later.
“It’s not just with finance. When you make decisions based on emotions instead of facts and data, it’s not usually going to turn out well,” Isola says. “Nobody is saying you shouldn’t be emotional or get upset. Just be aware that your behavior is going to be the biggest determinant of your success with investments and whether you achieve your goals. And being aware can help you make the right decisions for the long term. "