A recent Northwestern Medicine and University of Michigan study, chronicled in an article in the Journal of American Medical Association and posted on Medical Xpress, noted that people have a 50 percent higher risk of death if they suffer a significant financial loss.
The study found that a financial loss of 75% or more are 50% more likely to die in the next 20 years. 75 percent is a lot. Most people will not suffer a financial loss of 75%, but losses of 20% to 50% are common in the average bear market. Market losses will significantly impact behavior. Investing money is very emotional.
The reality is that when you are close to a large financial goal, e.g. buying a house, retirement, sending the kids to college, etc. you cannot afford large financial losses. I wrote about this previously in regards to retirement in the article Heightened Risks When You Reach Critical Mass. This applies to retirement, college education, or any other goals.
At Bartley Financial we manage investments to avoid what is predictable large financial losses. Why are they predictable? Because market valuation and the Nobel Prize winning work of Robert Shiller and Warren Buffet’s value indicator have proven that you can predict large losses. Stock market valuation is the best indicator of the future direction of the stock market. Like anything in life, when something is overvalued or undervalued it moves back toward the mean or average value. We post the market valuation on our website regularly. The problem is you don’t know when these financial losses will occur.
You don’t stop financially investing in an overvalued market, you adjust accordingly. Successful investing removes the emotions and adjusts according to the current market realities and probabilities. Defensive measures must be implemented or be at the ready to implement. You can still make money in an extremely overvalued stock market. Recent history is a perfect indicator that significant gains can be made. However, if you do not recognize that we are at a market topping, you could give it all back and then some.
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“If everyone is thinking alike, then no one is thinking.” – Benjamin Franklin
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