The Number One Impact on Your Investments is YOU

“God grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference.” — Reinhold Niebuhr

Recent volatility in the financial markets and a weakening US economy have tested the resolve of even the most patient of investors, and cast a shadow of doubt upon the most resolute in personal finance. What if the stock market continues its decline? What if the economy slips into recession? What should I do, if anything, to protect my investments? Where can I find the answers?

While these questions are normal in the face of uncertainty, the problem with them is that they are reactionary and seek answers from external sources. Those kind of questions suggest we have not sought answers from internal sources and, perhaps, have failed to ask questions that may be a bit more difficult, such as “Who am I?” and “Where am I going?”

I believe that it's important for us to limit our attention to those external sources we can not control, to instead allocate attention to things we can control, and, ultimately, to set forth on our own path rather than the path of others.

“Not being able to govern events, I govern myself.” — Michel de Montaigne

From a financial perspective, there are significant events that are not within our control:

  • Financial markets. As legendary economist John Maynard Keynes famously said, “The markets can remain irrational longer than you can remain solvent.”
  • The economy. As with financial markets, the economy moves in cycles. That's about where our absolute knowledge ends. To paraphrase Mark Twain, history may “rhyme” but it does not repeat itself.
  • Government actions. Fiscal acts (i.e. tax rates), monetary acts (i.e. interest rates), and geo-political acts (i.e. foreign government) have an incredible impact on the Big Picture of our finances, but no individual has any meaningful control over them.

There are, however, many items that are within our control as investors:

  • Asset allocation. We have the power to select a diversified mix of stocks, bonds, and cash. We also have the ability to control investment selection and investment types, such as mutual funds vs. individual securities, index funds vs. actively-managed funds, or even the use of “life-cycle” funds.
  • Holding period. While timing the market is a fool's game, time in the market is prudent. Based on history, between 80% and 90% of the returns attributable to market performance come from just 2% to 7% of the time in the market. Miss the market's greatest moves and you're doomed to under-performance.
  • Savings rate. This is a “no-brainer”. All other things being equal, increasing the amount you are saving or investing will have a much larger impact on your long-term account value than market movements or economic activity. Of course, in order to have a positive savings rate, we must spend less than we make.

All of the above controllable determinants of investing depend on your goals, objectives, tolerance for risk, and time horizon. None of these can be accurately determined without asking those challenging questions I mentioned previously: “Who am I?” and “Where am I going?”

“If I have even just a little sense, I will walk on the main road and my only fear will be straying from it.” — Lao-tzu

Lao-tzu sought the Tao or The Way. Buddha called it Nirvana. Socrates promoted “the examined life”. And Maslow suggested it is self-actualization, which we all seek. Before success in finances or any other area in life, we must first know ourselves. Here are some suggestions for finding your own “path” and staying on it:

  • Find yourself. Who am I? Why do I think and feel differently than others? How can I leverage this knowledge to benefit myself, my relationships, my personal finances? First, you are a human, then you are an individual. For the understanding of yourself as a human, I suggest the book, Emotional Intelligence: Why It Can Matter More Than IQ, by Daniel Goleman. For understanding yourself as an individual, I suggest the online version of the Jung Myers-Briggs Type Indicator. These are only beginnings. Self-awareness is a life-long pursuit. Seek information that will enhance knowledge of yourself.
  • Define yourself. Our “path” may be easily diverted by social conventions and language. For example, what is your definition of “retirement”? Where did your definition come from? Is your ultimate financial goal financial freedom? What is your definition of freedom? Define other words for yourself as well, such as rich, wealth, success, strength, weakness, and happiness. Otherwise, you are following the definition of others.
  • Allocate attention. Meaning, happiness, and control in our lives best derive from internal sources. So how do we limit external noise? A good start is with our informational media consumption (i.e. television, internet, paper media). If we are consumers of information, we must stop to think of what it is that information consumes — our attention. Were you seeking the information or was it seeking you? Be aware that information sources, especially those that are in the business of selling advertising, are trying to “capture” your attention. Capture your own attention first by creating a “portfolio” of information sources: For example: 40% Music, 30% books, 10% blogs and internet, 10% periodicals, and 10% television.
  • Think about “thinking”. Anyone can think. But to strengthen our reasoning capabilities we must learn to “think about thinking.” To provoke this level of thought, try studying philosophy. For some relatively easy reading, start with The Complete Idiot's Guide to Philosophy, then gravitate to philosophies or philosophers that speak to your interests.

No matter which direction we are walking or what life brings us — whether it is personal finance or anything else — we cannot be wrong as long as we are following our own path. We will make mistakes, of course, but they will be our own. And, because of our self-awareness, they will help us to grow stronger and to continue in the right direction.

I think The Financial Philosopher's advice is excellent. The main reason I struggled with money for so long is that I didn't know myself, and I didn't know what wealth meant to me. As I've come to understand myself and my aims in life, it's been easier to set goals for my money. (And I'm an ENFP, by the way.) Photo by Mr. Hayata.

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J.D.
J.D.
12 years ago

When I started this site, my goal was for it to approach personal finance from a holistic perspective. So many personal finance books and magazines focus only on the numbers — they treat people as if they were calculators. Over the past couple years, I’ve made an effort to stress the psychological aspect of personal finance. I’ve often stated that I believe money is more about mind than it is about math. It goes deeper than that, though. I believe that all of the choices we make in our life are bound together. There’s a reason I was a fat… Read more »

Aaron
Aaron
12 years ago

The Financial Philosopher writes: “gravitate to philosophies or philosophers that speak to your interests.” While I certainly agree that it makes sense to focus on what you are interested in, I would like to point out that one is more likely to learn more about herself if she spends a decent amount of time focusing on those philosophers with whom she DISagrees. I would think that this is a good way to study personal finance as well. If you think you should allocate most of your investments in, say, bonds, I think it would be in your interest to seek… Read more »

KC
KC
12 years ago

I was reading in one of Jim Cramer’s books (he works for CNBC) that ratings on CNBC actually go down when the market is doing bad and go up when it is good. He said that should be inverse, but it goes to show that people get in the market when its up and stay out (or try to tune it out when it is low). I thought that was interesting. Personally, I can’t turn CNBC off right now – and its depressing 🙂 Fortunately baseball season is underway and I can catch some preseason games to make me happy!… Read more »

Brad
Brad
12 years ago

J.D., you need to give Kent a pat on the back for me. I’ve been reading GRS for over a year (!) now and this is the first article to have struck a cord with me outside of the financial realm. Rightly or wrongly, GRS has focused on only one aspect of “success”; managing your finances. I’m glad you included this post as it’s important for everyone to realize that money means nothing if you’re not satisfied with the other parts of your life. Oh, and I’m an INF/TP.

Cheers,
Brad

FourPillars
FourPillars
12 years ago

I think the number one impact on your investments is your financial education.

The more you read and learn, the better off you will be when creating your investment plan (or philosophy).

Mike

The Financial Philosopher
The Financial Philosopher
12 years ago

J.D. Thanks for the guest post opportunity! Your personal story is quite interesting. I wonder if GRS would exist if you had not found your “path?” Aaron: For many people, it is easier to discover who we are NOT before we discover who we are… Philosophers are known for voicing their opinions and, quite often, the most notable thinkers are quite eager to disagree or contradict other philosophers and ideas. There is no doubt, however, that finding philosophies and ideas that “speak” to us can bring more clarity to who we are. That self-knowledge, in turn, further clarifies who we… Read more »

7million7years
7million7years
12 years ago

Had an interesting ‘chat’ with a lady-attorney on NetWorthIQ.com on this subject; she started asking about a very common financial goal (“what % of my salary should I be aiming to retire on?”) … after a few back-and-forth comments, she realized that she first needed to establish her ‘life goal’ then work backwards to the subject of money. Life first / money follows …

Saving Freak
Saving Freak
12 years ago

That is the great thing about being debt free. It frees up your life so you can set and achieve goals that matter to you. Earning money no longer restricts you to a single work place because you can easily pay your bills on less than you make at your job.

Aaron Pinkston
Aaron Pinkston
12 years ago

Kent, I’ve been a fan of your writing for a little bit now. In my INTJ way, let me say that it has a higher truth value because you encourage people to find their own best method rather than pretending to have the answer for everyone. Sorely needed.

I think few people who do what you do are able to write so well about it. Congratulations on another well written article.

Stephen Martile
Stephen Martile
12 years ago

Hey JD, I totally agree – our investments are ‘us’ in a matter of speaking. One person can take an investment and it will skyrocket while another person will take another investment and it will totally crash. It has alot to do with our point of attraction than it has to do with the investment. Our hidden wealth files are probably where 99% of the problem occurs – in our unconscious minds. These false beliefs about money hold most people back regardless of what type of action they take. For more, see: How to Change Your Beliefs with Praxis, Part… Read more »

Lisa
Lisa
12 years ago

Have you heard of that book and movie called The Secret? It describes how to manifest anything you want by thinking positively about it.

Being the pragmatic type, I am not sure I believe it. But that is probably why I’m not rich yet!
Lisa

The Financial Philosopher
The Financial Philosopher
12 years ago

Lisa: In the post, I referenced author, Daniel Goleman, and his book, Emotional Intelligence. Here is a (long) quote from him that I concur with regarding “self-help” books: “If you do Tai Chi every morning, or yoga, you are doing that with your skeleto-muscular system and perhaps your attention, if you are doing it mindfully. If you are doing mindfulness meditation, you are doing it with your ability to attend to the moment. However, if you are reading a book like ‘The Power of Now’ but don’t do anything about it, you may feel great while you’re reading, but it… Read more »

Jacques
Jacques
12 years ago

Very good article. I truly believe in knowing oneself first and finding his own path. The process of self-discovery will – as a side-bonus – help better accept & understand the markets much better as we know why we invested. Simple idea, yet so powerful !

barb
barb
12 years ago

can you explain this a bit more…I’m just beginning my study of investing…thanks.

Holding period. While timing the market is a fool’s game, time in the market is prudent. Based on history, between 80% and 90% of the returns attributable to market performance come from just 2% to 7% of the time in the market. Miss the market’s greatest moves and you’re doomed to under-performance.

Ryan S.@uncommon-cents.net
12 years ago

Bravo! There’s so many things we -can’t- control with our investments, but there are some things we can, and that’s all about our own behavior. Not allowing our emotions to cause us to buy or sell irrationally make all the difference.

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