As an investor it sometimes feels like we have very little control of the things that are happening around us. It doesn’t help that these things can often have a great deal of influence on our financial wellbeing. We tend to worry about recessions, stock market crashes, rising interest rates, corporate profitability, tax and monetary policy, political agendas and everything else that may hurt our portfolio value. While it is true that we have absolutely no control over these factors, I would submit to you that we do have control over something infinitely more important than all the factors listed above and that is we are in control of ourselves and the decisions we make. We truly are in control of what matters most.
One of my favorite books that articulates this point very well is The Intelligent Investor written by Benjamin Graham. Warren Buffett called this book “By far the best book on investing ever written.” Mr. Graham states that being an intelligent investor “has nothing to do with IQ or SAT scores but simply means being patient, disciplined, and eager to learn: you must also be able to harness your emotion and think for yourself.” Additionally he said “it is a trait more about character than of the brain.” Jason Zweig, an investing and personal finance columnist for the Wall Street Journal, providing commentary of Graham’s book, put it succinctly by saying, “Recognize that investing intelligently is about controlling the controllable. You can’t control whether the stocks or funds you buy will outperform the market today, next week, this month, or this year; in the short run, your returns will always be hostage to Mr. Market and his whims.”
Because there are so many aspects of the investing process we can’t control, it is vitally important that we focus on the factors that we can control. This begins with ourselves and our ability to manage our emotions and to think productively for ourselves. Often times this means turning off the talking heads on the various financial networks and choosing not to be drawn into reading articles specifically designed to incite fear and concern. It can also mean dealing productively with comments and conversations with friends and associates regarding their thoughts and ideas on financial topics. As an investor it is important to understand you are not in competition with anyone except your own goals and metrics. After all, our chief goal is to ensure that our investment strategy is working the way we intended it to and not necessarily to outperform our neighbor or friend.
Once we are safely in control of our own investment behavior we can turn our attention to other important aspects of the investing process. As it turns out, these other aspects tend to have a far more significant impact on our long-term investing success than many of the uncontrollable factors. I have listed below several of the most important investment factors that we have complete control over and merit our full focus:
Your investment expenses – keep your expenses low by avoiding commissioned products, expensively managed funds and by trading efficiently and patiently
Your ability to take the right amount of risk – take an appropriate amount of risk by understanding your required growth, your personal risk tolerance and your time horizon
Your ability to diversify and rebalance your portfolio – mitigate risk through proper diversification and systematic rebalancing
Your expectations – manage your expectations by setting reasonable expectations for portfolio growth
Your tax liability – reduce your tax liability by holding stocks for the long-term, owning individual stocks as opposed to funds, harvesting tax losses and donating long-term capital appreciated securities in taxable accounts
Your financial plan – create, implement and regularly monitor a financial plan that will help chart your way to financial success
Your savings rate – save aggressively (a minimum of 15%) while you are in the accumulation phase and let the magic of compounding interest takeover
Your spending/distribution rate – take informed distributions from your nest egg while in retirement to ensure against running out of money
Every investor needs to possess a certain amount of confidence that markets will continue to function and adapt as we move forward. Additionally, it is helpful to have the understanding that economies and markets tend to be cyclical and experience periods of growth and expansion followed by periods of contraction. In fact, this is the very nature of economies and markets. With this basic level of confidence and understanding an investor is much better equipped to manage emotions, be patient and make disciplined investment decisions. This ability in conjunction with controlling the controllable will hopefully help lead us to experience some peace of mind and some of the same success that Benjamin Graham experienced. He ultimately made this observation, “Through all their vicissitudes and casualties, as earthshaking as they were unforeseen, it remained true that sound investment principles produced generally sound results.”
At Net Worth Advisory Group we love to help our clients design and implement custom financial plans while providing ongoing investment management advice. If you would like to visit with a fee-only financial planner and discuss how you can more effectively take control of the controllable click on the link below.