Let’s face it, many financial decisions that you make in life don’t work out as planned. The key is to survive poor choices and live to fight another day.
One of the best mutual fund managers in history, Peter Lynch, said “If you’re terrific in this business, you’re right six times out of 10.” Live to fight another day.
I’ve lost count of the number of times that clients ask, (jokingly I think), when their globally diversified portfolio might outperform the random best performing asset class in any given year. Live to fight another day.
The problem is it’s difficult to know precisely where the line is that separates fear from greed.
Survive for The Long-Haul
Creating and following a financial plan aimed at surviving for the long-haul matters above all else. Surviving beats “the best” or “the smartest” in the end.
A reality based financial plan survives because it focuses on flexibility, understanding errors will inevitably occur. Good financial plans bend but don’t break.
2020 has highlighted the importance of being nimble. Good financial planning acknowledges and recognizes current reality. Great financial planning embraces this reality and adapts.
Perhaps you’ve heard the story about Ronald Read, a janitor and gas station attendant in Vermont. He passed away a few years ago in his 90’s having amassed an investment portfolio valued at more than $8 million.
He lived a frugal lifestyle, invested regularly and held onto his investments for the long haul.
Ronald Read demonstrated patience and that’s in short supply today. If our decisions don’t work out next week or next month, we want to jettison the whole idea and go off in a different direction.
I’m reminded of a message that appeared in business magazines during the 80’s that said “Drive like you’re crazy and the rest of the world is sane.” In short, do what the rest of the world isn’t willing to do. Have patience.
Money choices and investing decisions don’t necessarily reward “the best” or “the smartest” but do reward persistence. The problem is we’re so used to looking for “the best” or highest rated restaurant, hotel, personal trainer, or even doctor, it’s difficult to adjust our thinking when it comes to personal finance.
Stay in The Game
I recall talking to a business owner client who was a few years ago regarding his retirement account that we managed on his behalf. We were reviewing the portfolio over different time periods and while he was generally satisfied, he said he really wanted to have “the best or highest” investment returns, not just performance that was “good enough.”
The problem with his desired approach is he failed to recognize that “good enough” investment returns allowed him to stay in the game and live to fight another day. His long term aspirations were coming into focus more clearly with each passing year.
Many investors believe that choosing “Five Star” funds or investments on some “Top 100” list will be a good idea.
Interestingly, though not surprising, there is significant research about how poorly investors have fared over several years’ timeframes buying these “best performing funds.”
Generally, investments that are top performers one year fail to repeat in the subsequent years. In some instances, funds at the top of the performance charts one year are near the bottom the very next year.
Remember, you are not investing for a single year but rather for your investing lifetime which might be 20, 30, 40 or more years. Live to fight another day.
The fundamental mission of the “pretend advisors” that are on every corner is to convince you that they have some special skill at selecting investments so that only “the best” make the cut. This has always been false.
What’s Your Purpose for Investing?
The way to live to fight another day is to center your focus on your purpose for investing and then to create a flexible, adjustable financial plan around that purpose.
Investing on purpose, for a purpose sounds super easy but alas, it’s actually extremely hard. Zeroing in on your purpose for investing is usually where the difficulty begins.
Very few investors have this figured out and flounder around just assuming “more returns” will fix everything.
Rather than thinking about your investing purpose as something concrete and tangible, like retirement, consider something intangible, like having more free time.
More control over your time is the cornerstone of financial independence.
Big Bets Often Lead to Big Mistakes
Making big bets in life can sometimes payoff but more often can lead to regret and big mistakes. Big mistakes are miscues that have the potential to be lifestyle altering.
Big mistakes can arise simply from bad luck but more often from failing to realistically understand the entire range of possible outcomes from decisions.
Whether it’s from inattention or ideology, many investors totally mis-calculate how they might respond when things don’t go exactly as planned.
In my experience, investors often are willing to make big bets because they are falling behind on funding their tangible goals. If you lose the bet, however, you’re even further behind.
Are You Trying to Play Catch Up?
There are numerous research studies that show just how damaging trying to play “catch up” can be with your investments. One interesting study published recently from the Catholic University in Louvain, Belgium titled Do Individual Investors Bite Off More Than They Can Chew? examined over 4100 retail investors’ brokerage accounts.
Roughly one-quarter of these investors had target returns of 8-12% per year above inflation or roughly 11-15% per year in average returns. Another 41% expected above inflation returns of 5-7% per year for their portfolios.
As context, over long stretches of history, a 100% stock portfolio has returned about 4-6% per year above inflation. So, in this study, two-thirds of the investors were aiming for returns above what almost a century of data has demonstrated is realistic.
This research found that investors who expected the highest returns actually fared the worst over the 51-month period covered by the study. Those with more reasonable return targets obtained the highest returns. Oh, one more thing, women had better returns than men on average.
Gaps between reality and expectations play a huge role in financial decision making. How you (subjectively) view your financial acumen and literacy has an outsized impact.
Trying to play “catch up” because you “need” high returns can be a very dangerous game. Realize that you can’t engineer investment returns and your financial future will be better.
Life in general, and certainly your financial life, doesn’t come with a playbook. It’s incredibly important to protect your purpose and plan your actions with that purpose always in mind. Live to fight another day. Start there. Ready for a real conversation?