Recently, I received a gift from the Iowa State Patrol in the form of a speeding ticket. (If you’re reading this, sorry mom.) I was on my way home from dinner with friends and was in a rush. In reflecting on this experience, it occurred to me that I took an unnecessary risk to attain something I didn’t need and ended up sacrificing money I didn’t have to lose.
As investors, we’re constantly tempted to make this same error in judgment. We focus too much on the return we could get, and not enough on the return we need for our financial plan to be successful. Would I have made it back a few minutes earlier had I not gotten pulled over? Sure. Did I need to be back a few minutes earlier? No. Could you make a little more money taking on more risk? Sure. Do you need to take on that extra risk in order to make your financial plan work? Probably not.
Instead of falling into the trap of doing something we don’t need to do to attain something we don’t need to have, investors should focus on the following two things:
1. Understand and remember the goal of your investment experience.
Don’t measure the success of your portfolio on whether it’s making you the most money possible. Instead, remember that your portfolio exists to support your plan. In other words, it’s what you want to do in life that matters most. Measure the success of your portfolio on whether it’s doing a good job of positioning you to realize these goals. While everyone likes a great portfolio return, losing sight of the role it's supposed to play – helping you do the things you want, hope and or need to do – tempts you to make decisions based on fear or greed. I got greedy the other night, and it led to a bad outcome. That’s often the way it works with our investments.
2. Harness the markets.
Let the market work for you instead of trying to outguess or beat it. Can investors have successful outcomes by trying to predict the short-term future and making bets based on those predictions with their choice of stocks? Certainly. But, these success stories are nearly impossible to repeat and the associated costs and risk required to do so can be substantial. In general, trying to beat the market – the equivalent of speeding when I didn’t need to – isn’t worth it. Sure speeding could have gotten me home a few minutes earlier, but the associated cost and risk were unnecessary to accomplish the most important goal, to get home safely.
At Foster Group, we love to help clients with those items. We are firm believers in aligning portfolios with purpose. We want to understand your financial goals and risk tolerance, and help you get into a portfolio that has a high probability of success. We are also firm believers in harnessing the market and letting it do the work.
If you’d like help with the concepts mentioned in this blog post, please give us a call.