How your financial progress might look at any one point in time all depends on how wide a time period you take into account. Taking too narrow a snapshot will lead you to the wrong conclusion, causing you to make financial decisions based on incorrect information and resulting in regret later. The worst times to take a snapshot of your financial health is when you are going through unusually good or bad times in the markets. Unfortunately, those are precisely the times you are most likely to take a look, when the emotions of greed and fear are at their most intense extremes. Ideally, you should save your financial check-up for more normal times.
When you are going through unusually tough times in the markets (such as the bear market from 2000-early 2003), you need to buck the prevailing crowd psychology, and avoid drastically changing your long-term investment strategy in response to short-term conditions. Financial decisions are best made and financial progress best measured during more normal times, away from the extremes.
We’re all subject to the natural temptation to make long-lasting, significant financial decisions based on short-term conditions, which might be anything but normal. These conditions are particularly poignant to us, as they represent the most immediate reality, giving off the appearance that they might last forever. The natural human inclination to extrapolate the most recent past into the indefinite future is one of the greatest threats to your ability to reach your long-term financial goals. In fact, markets swing like a pendulum from extreme to extreme, passing through a zone of normalcy from time to time. That’s why we have recurring bull and bear markets throughout investment history.
Why are so many investors prone to learn the wrong lessons over and over again by selling in panic near market bottoms and piling into the market near peaks? The failure to take a wide enough snapshot obscures where a particular market environment lies on the wide spectrum of possible market conditions that swing between optimistic and pessimistic extremes. We tend to over-emphasize the most recent past, extrapolate trends indefinitely and draw our conclusions and lessons from that and that alone.
To avoid being distracted from your long-term wealth accumulation progress and to remain on track, we encourage you to recognize our natural human tendencies to extrapolate the recent past, and come up with a coping system to resist this. Balance and perspective are key. The market in fact regresses around a mean; normal market conditions always return with time. Recognizing this and taking a wider-angle view of the markets will help you stay on track with your financial plans without being overly discouraged during bear markets or carried away in bullish times.