Usually, it's nice to have choices in your life – unless analysis paralysis sets in, and choosing becomes a chore. We've all been there, haven't we? I've been known to get bunched up just picking which cereal to buy for my kids. There are so darn many, sometimes I can't decide. I call this "indecision prison."
What then? If you lock up over your breakfast preferences, oh well. But when your retirement savings are on the line, it's far more important to not sacrifice your good decisions to bouts of indecision. Mind you, I'm not saying you should be churning out new decisions every time the markets make a move. My point is, you can expect better outcomes if you are deliberate about the choices you do make.
Beyond over-thinking our choices to the point of gridlock, there are other ways we often defeat our own best decision-making. Missing or inaccurate information can lead us astray. Sometimes, we know what we should be deciding, but our emotions get in the way. Other times, it's high time to correct a past bad decision, but we can't quite bring ourselves to admit defeat. Any of these can cause you to become immobilized by indecision.
For example, let's say a bear market is devouring your retirement nest egg. Instead of deciding to remain calm (knowing what goes down is likely to eventually head back up), you panic and move your assets to the sidelines. "I'll reinvest as soon as the coast is clear," you tell yourself.
Whoops. You've landed in indecision prison. Because now, how will you know when to get back in? A few weeks may turn into a few months, and then a few years of sitting outside the market, undecided.
"At least I'm not losing money," you may argue. But is that true? To retire as hoped for, you usually need to earn some market returns over time, so your savings don't lose ground to inflation. To do that, it's best if you: 1) create a plan that fits your long-term needs & goals, 2) stay put in the market according to your plan, 3) focus on the details that matter, such as keeping your costs low and your investments invested.
This sort of long-term strategy offers at least two advantages:
1) It helps you avoid analysis paralysis in the face of continuous market movements and a glut of investment "opportunities." (Like that breakfast cereal aisle, many retirement plans serve up a mind-blowing array of choices to consider.)
2) It ensures that whenever market returns do occur (which is often dramatically and without warning) you've already "decided" to receive them by being positioned in advance to do so.
Check out this illustration by J.P. Morgan, suggesting how important that second point is to your retirement savings. If you miss even a few of the best trading days in any given year, your overall returns can suffer dramatically.
Most of us need help when it comes to the management of our retirement resources, but deciding which advisor to work with can lead us into indecision prison with all the choices. Next month we will offer some questions to ask your financial advisor so you can avoid spending time in indecision prison!