The Indy 500 is over for another year! Whether you celebrated with a backyard cookout or on the track’s third turn, thinking about your financial plan probably wasn’t top of mind. However, the way the race teams develop and execute a race-day game plan is actually similar to preparing a winning financial strategy for your family.
In the same way a race plan relies on each member of the team to do their part to prepare for the big race, your financial plan and investment strategy should be carefully crafted to consider the specifics of current financial health, goals, and tolerance for risk when it comes to investing. If the correct strategies are implemented successfully, you just might end up with your own brickyard finish!
Preparation: The Time Trials
As you watch cars zip around the track, it’s easy to overlook all the preparation it took for the teams to get race-ready. Before the starter’s green flag drops, each team establishes a plan and determines how they’ll respond when things change. That plan differs for every driver depending on their starting position or their particular strengths and weaknesses behind the wheel. Expert pit crew members also perform specialized tasks and monitor the car to ensure it remains in optimal condition throughout the race.
Like a race team, prior to investing your money in the stock market you should develop a plan tailored to your own specific situation. Begin by evaluating your own personal finances. What are your goals? What is your monthly budget? What are you realistically able to save and are there unnecessary expenses you could cut? With answers to those questions laying the foundation, a professional advisor can help establish a plan and determine the best mix of investments with varying degrees of risk that is suitable for you.
Implementation: The Green Flag
The pace car pulls off the track, the race begins, and the cars are off! Going full throttle after the starter waves the green flag may initially catapult a driver to the front of the pack, but that’s not a sound long-term strategy. What counts is where each car ranks as it crosses the finish line. Pushing a car too hard out of the gate can cause it to break down and likely fall short of the ultimate goal.
This tactic is the comparable to high-risk investing, where the goal is to make a lot of money fast, with little regard to the long term viability of the strategy. Going all-in on risky stocks may give you big returns one day, but is unlikely sustainable. A financial plan with a clear objective and an investment strategy that includes a diversified portfolio of stocks and bonds is more likely to move you steadily toward your goals. Like the best drivers, you have to pace yourself.
Adaption: Navigating Through the Crash
Typically, at some point a crash will occur. Some cars will spin out while other less fortunate ones will collide with the wall. Often, cautious drivers can avoid the most catastrophic collisions, but sometimes the fallout impacts everyone. Whatever the case, a driver’s ability to recognize the situation and adapt quickly will largely determine the impact of the crash.
Collisions, blown tires, and bent frames are commonplace in racing. This is similar to the smaller downturns suffered by markets in the financial world. Larger racecar pile-ups are like a stock market crash. Thankfully, those don’t occur all that often.
Trained pit crews can fix bent frames and replace tires to get the car back on the track. Similarly, downturns don’t necessitate a complete overhaul of your financial approach. Use your long-term strategy as guiderails and work with your advisor to make adjustments on the margins, where appropriate. As in racing, recognizing that large-scale changes are seldom necessary will help you avoid overreacting and stay on track to reach the checkered flag.
Accomplishment: The Checkered Flag
Successfully navigating the Indy 500 requires preparation and commitment from the entire crew. In the same way, a good financial planner and investment advisor can help develop a winning strategy that steers you toward a balanced portfolio. This way you won’t feel like you’ve hit the wall each time the market declines.
Unlike the Indy 500, however, your financial planning journey never really ends. Your goals and situation constantly evolve and change. While there is no ultimate checkered flag, if you stick with your plan, then you are likely to feel as if you crossed that financial “yard of bricks” and gained your place in the winner’s circle as you reach each financial goal along the way!