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July

The Inevitability of Market Downturns

Recently, the International Journal of Medical Education published an article by authors from my alma mater, Washington University in St. Louis, which assessed residents’ and fellows’ knowledge of finance principles.

Despite medical professionals’ high degree of specialized knowledge in their own field, the research showed that young trainees had low financial literacy, low tolerance for investment risk, high debt, and deficits in their financial preparedness.

In my experience, these themes are not limited only to those in the medical profession. Instead, I suspect it is reflective of our broader society’s aversion to math and lack of financial education at school or the workplace.  However, what surprised me was that higher income does not necessarily correlate with greater financial knowledge.

Want to see how you compare to those evaluated in this study? The authors utilized a 48-item questionnaire to collect data for their paper, but I provide a shorter, simpler diagnostic tool to assess financial literacy to my clients and prospects upon request. If you prefer a more do-it-yourself approach, visit these educational resources to test your own degree of understanding in this subject area:

  • Napkin Finance:  Finance topics explained on the back of a “napkin” in 30 seconds or less
  • Khan Academy: Online education platform that includes personal finance items

Perhaps you’ve seen similar statistics, or can relate because it sounds familiar. Why does this matter? Well, financial literacy provides a broader perspective and the tools required for people to prepare for an uncertain future. And because uncertainty is part of investing, it’s important to have — and stick to — a plan.

There have been many recent stories in the press speculating about why volatility has been low, how this is related to the real economy and global events, and what it might mean for future returns.  However, the stories are just that: stories.  We must ALL be reminded that uncertainty and market declines are part of the nature of investing.  Therefore, a degree of mental preparation is necessary. Uncertainty is not a pleasant experience for most investors, and market downturns can bring discomfort. But learning to embrace the inevitability of a downturn can be liberating. Instead of constantly worrying and fearing a market downturn, accept it as inevitable and bake that inevitability into your investment plan.

If you have developed a Financial Goal Plan or have had one developed for you by a licensed or certified financial professional, in most cases it will already be an adaptive plan.  Asset allocation and diversification are two effective risk management tools at your disposal.

When should you make major changes to your investment plan? Significant life events are what warrant a revision, not changes in market headlines.

Learn more about the author, Ronsey Chawla, MBA, CFP®.


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