With the stock market pulling back from record highs, I find myself having a familiar conversation with clients. I call it the floor and ceiling problem. When you log in to look at the value of your investment accounts, you may no longer be looking at your biggest number ever. This might cause you to feel a sense of fear. You hear a voice saying, Whatever you do, don’t go backwards. Don’t let that number go down any further. We all hear that voice. It’s a part of the human condition, and it causes the floor and ceiling problem.
A funny thing happens as our net worth climbs. Our ceilings become our floors.
We set our sights on a certain number and when we finally reach it, we want to set up camp there. With our emotions attached to this new number, the ceiling, it is suddenly crucial that we keep it. We draw our new line in the sand at this number because now we have it, and it becomes the floor. A number we didn’t even think we would achieve is now our minimum. This mindset blocks our ability to invest in our lives through experiences. It also prevents us from stewarding our resources well.
Let’s say our portfolio has never reached two million dollars. Thanks to the ongoing bull market, it does, and now two million is the new normal because it is what we have. If it were to drop back down below that floor, we would feel anxious and worry about our future. We didn’t feel that anxiety on the way up when it was 1.9 million. Now, since we have a new floor, if it went back to 1.9 million, it would hurt. It would mean something bad. So, we look for ways to “lock it in.”
Selling our investments to cash feels safe. However, by locking ourselves in at the new floor, we prevent our ourselves from higher achievements. No new ceiling will come our way if it is not able to fluctuate.
We think we’re protecting ourselves from the worst and in reality, we are protecting ourselves from the best.
Who would have thought that our fingers would become so clenched? This posture feels like protection and it freezes us like rigor mortis. We’ve always felt a pull to keep climbing and once we arrive, we’re stuck. We stop stewarding our money with the financial wisdom that’s gotten us to this point.
The other way that I see people try to “lock it in” is by avoiding spending some of the money they have saved. I have had conversations with clients about the trips they said they would take, or the hobby they would invest in, but they can’t.
They say, “But then I would have to take money out of my retirement account and it would go down below 900k.”
My response is “I don’t know if you know this, but you are retired. What did you save the money for?”
They never really expected their retirement account to have this much money in it. Now that it does, they can’t imagine spending it!
This reminds me of a commercial where people carry numbers around with them to represent how much they need to retire. The actors in the scenes look happy, but our collective psychology is much darker. So many people carry around an arbitrary number like a ball and chain. They are married to it just because it is what they have. Fluctuation from that number drives them crazy.
Meanwhile, the market is a boy with a yo-yo walking up a hill. Most people base their contentment on the cycles of the yo-yo. They miss the steady progress of walking up the hill. They make each up and down cycle of the yo-yo mean something it doesn’t mean, and they miss out on a rich life because they are watching a number go up and down. All the while, they are making progress toward their long-term plan, but they don’t feel that way.
So, how do we prevent the floor and ceiling problem?
Remember to keep your portfolio number neutral in your mind. Accept it at its face value. Don’t marry it. Let it go up and down and sideways because that’s what it needs to do. Many of my clients will tell you that this loose grip secures your retirement far more than the anxious clutch. By keeping this perspective, you will protect your peace of mind — and history tells us that you’ll reach ceilings you have yet to imagine.