I’m currently reading Morgan Housel’s book, The Psychology of Money. If you’re looking for something to read, it’s well worth your time.
He notes this remarkable fact at the beginning of Chapter 4, “$81.5 billion of Warren Buffett’s $84.5 billion net worth came after his 65th birthday.” The title of the chapter is “Confounding Compounding” and is about being patient and taking the long view.
Why write an entire chapter on this?
Because we’re human and it’s easy to get myopic, evidenced by seemingly urgent questions like:
- What’s the Dow and S&P doing today?
- Should I sell?
- Should I buy?
- If so, what should I sell?
- What should I buy?
- When should I do all these things?
And perhaps the most anxious and pervasive question, “What am I missing out on?”
There’s also this: If you’re in a globally diversified portfolio, there will likely be portions of your portfolio that won’t compare to the segment or stocks that are killing it right now, and the people who own those will make sure you know about it!
Taking the long view is never easy. At least, it hasn’t been for me. I’m approaching 50, and I’m not sure I’ve gotten any better at it. With the advent of social media, the continuous news cycle, and the phone-sized computer in my pocket, it’s perhaps more difficult than ever. COVID hasn’t helped either.
But, taking the long view is beneficial in almost every aspect of our lives: with our families, with our friends, with our health, with our personal development, with our values, (with our politics?!), and yes, with our money, as well. Yes, we need to live and make decisions every day, but the hope is that we make those short-term decisions with an eye toward what will matter in the long run. This isn’t easy. We are not good at doing this as human beings.
Later in the 4th chapter, Housel writes this,
“There are books on economic cycles, trading strategies and sector bets. But the most powerful and important book should be called Shut Up and Wait. It’s just one page with a long-term chart of economic growth.
The practical takeaway is that the counter-intuitiveness of compounding may be responsible for the majority of disappointing trades, bad strategies, and successful investing attempts.
You can’t blame people for devoting all their effort – effort in what they learn and what they do – to trying to earn the highest investment returns. It intuitively seems like the best way to get rich.
But good investing isn’t necessarily about earning the highest returns (italics mine), because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”
One of the primary roles we play as financial advisors is to help our clients remember to take the long-view. (Side note: we do this for each other at Foster Group behind the scenes!) It might sound strange, but academic studies have pointed to just how much money might be gained (and not lost) simply by having a financial coach helping you sit still when you want to jump.
At Foster Group, truly caring for our clients means taking the time to learn what’s in their hearts to help them pursue their goals. If you’re looking for help in taking the long view with your finances, give us a call. We’d love to help you take a deep breath . . . and talk.