In the News

To Handle Hard Times, Plan for the Long Term

Want to be more prepared next time there is market turmoil and general panic sets in among investors? Try writing a financial plan.

Research published this month by Advisor Impact Inc. shows that people who write a plan of how they will react when the going gets tough are more likely to deal better with market upheaval, says Michael Finke, professor of personal financial planning at Texas Tech University who is analyzing the survey data in conjunction with Advisor Impact.

"Many individual investors tend to time the market badly," says Mr. Finke. "They feel more comfortable investing when the stock market has recently gone up and they tend to pull the money out when the stock market is falling, which leads to underperformance."

"The pathway to maintaining a consistent portfolio allocation appears to be the articulation of long-run goals in a written financial plan," Mr. Finke says. And that, he says, can help investors ride out the bad times.

According to the research by Advisor Impact, a Toronto-based research and training company for advisers, 72% of those with a written plan felt somewhat or very prepared to cope with a significant market downturn, compared with 59% of those with no written plan.

Of the 1,207 investors across the U.S. who responded to the survey, 48% of those with a written plan said they were confident they would reach their primary financial goal, compared with 32% of those without a written plan.

Of course, writing a meaningful financial plan takes some thought. Some people have no idea how much money they need in order to retire, says Michael Kitces, director of research at Pinnacle Advisory Group in Columbia, Md.

"There is a little bit of complexity to the analysis," he says. "It's not as simple as writing down your age and thinking [a figure] in your head."

"There needs to be a concrete goal: I need this much money in order to pay for the retirement goals that I have," Mr. Kitces says. "Once you have a goal, you will know when you've actually reached it. You will also know when that goal is in trouble," he says.

"If there is a horrible market decline and you need $1 million to retire and your portfolio just went from $2 million to $1.5 million," Mr. Kitces says, "you should have no reaction whatsoever. If the reality is you need $1 million to make your goals work and you went from $1.2 million to $800,000, you can begin to respond to it appropriately."