It is fair to say that a current event or media blast can easily divert us from our long-term ambitions. Over the past 30 years, we have witnessed many market booms and market bottoms. We have seen the economy flourish and falter. Unbelievably tragic events have made us wonder what the future holds for humanity. At the same time, progress has created technologies and opportunities we could hardly imagine. Reputable companies like Kodak, GE, Blockbuster, and Blackberry have fizzled in popularity, while others such as Nvidia, Netflix, and Apple have grown. Things around us always change, and we have little control over most external events. Yet, due to an illusion of control, we convince ourselves we can predict an outcome.
I recently read the book The Soul of Wealth: 50 Reflections on Money and Meaning by Dr. Daniel Crosby, a psychologist and behavioral finance expert. Among many observations, he shared how near-term fear can cause us to minimize long-term logic.
Imagine you have built an investment strategy designed around the goal of retiring some years down the road. You understand that it is prudent to buy low and sell high. You also know that diversification helps to reduce risk. These are both cornerstones of investing. However, daily behaviors, innocent as they may seem, can significantly impact future financial success. For example, if you review what happened to your investments on a specific day, you will likely focus on an underperforming investment. In that moment, you forget the role that specific investment plays in the bigger picture – after all, the investment missed its earnings projection for the quarter. If you sell that investment, you assume you can predict the future. You are acting on an illusion of control.
If there is anything I’ve learned in my years working with investments, it is that predicting future outcomes is extremely difficult.
The goal of investing should not be outperforming the market but rather preparing for future events or experiences. By anchoring investing to a goal, you create a reason to save and invest regularly over many years. How will being retired feel? Do you look forward to traveling, spending time with family, or picking up a new hobby? Focusing on the goal makes us less likely to be sidetracked by current events. Suddenly, the fact that company XYZ missed its earnings target has less of an impact on how we feel about our goals.
Investing for the sake of having more money may not provide joy or satisfaction in the long run. When visiting with retirees, I’ve asked how they feel about their retirement years and what they would have done differently. No one has said they wish they had made a specific investment trade. Most reply with statements like, “I wish I had spent more time with family and friends creating memories,” or “I wish I had traveled more while my health was good.”
Think about your investments. Are they anchored to a goal? If not, now’s a good time to reflect on what you want to accomplish.
