As you walk along the path toward financial independence you encounter many opportunities – including the opportunity to exchange truth for error.
Every day you experience distractions from information that competing for your attention. Much of this information contains some elements of truth, but also is laced with error. How well you avoid reacting to information that isn’t grounded in truth ultimately sets the anchor for your financial future. Best-selling author Morgan Housel says “the real question is how you can endure a never ending parade of nonsense.”
WHY FINANCIAL TRUTHS MATTER
Let’s look at a few financial truths along with some compelling errors:
- Time is the most important element within your financial life. You never know how much time you have left. Financial plans usually contain very specific assumptions about time – in truth how long you need your money to last is largely outside your control.
- Investing is always about your future. To be a successful investor you must be a permanent investor. An emotionally appealing folly is to believe that you can time your investing to only be in the market during good times, while avoiding bad times.
- Money and everything that surrounds money is very personal – this is a steadfast truth. Your perspectives and money experiences are different from everyone else. The heavily conflicted financial media wants you to focus entirely on the extremes instead of your own goals.
- There is no such thing as normal when it comes to investing—the only normal is change. You might be tempted to wait for more normal times to invest, but when is that exactly? Over the past 95 years, the returns for the S&P 500 have averaged around 10% annually, but there are only 6 years that are within 2% of this average. There haven’t been many normal years!
- Investment risk isn’t math—it’s not quantifiable. You can’t fully codify risk in a way that helps you make good decisions. Answers on ‘risk tolerance’ questionnaires aren’t useful in determining your portfolio risk—only your specific goals can guide that decision. Many investment firms regurgitate extremely detailed risk tolerance numbers as if the only input to consider is quantitative. This can provide you with false confidence and distract you from making good quality decisions.
HOW TO AVOID FINANCIAL ERRORS
Embracing truth within the financial domain provides you freedom from worrying about the never-ending parade of daily distractions. Markets will always go up and down, not up and up. Market corrections will occur – don’t be surprised. There will often be tension between your expectations and what you can realistically accomplish – that’s the truth.
The long-term above inflation returns from the financial markets are accessible if you let the markets work and avoid letting emotions rule. That’s the truth. Start there.
Related: The Power of Small Things