Shortly after my two older children received their driver’s licenses, I enrolled them in a class where they learned how to control a car in an emergency - braking, skids and quick lane changes. To me it looked like pure fun, driving brand new BMW’s with the throttle to the floor and then slamming on the brakes while turning a corner to learn how to control your car with anti-lock brakes. Adding to the thrill, some of the instructors were race car drivers who have the skill to drive a car at its limits without losing control.
A lesson in human psychology
One of the interesting phenomena they taught is how drivers react in emergencies, and it gave me some insights on how our minds work. Here’s the scenario: while driving down a city street on the way home from work, the driver swerves to avoid a car that cut him off. But in avoiding the other car, he loses control of his own car and finds himself careening toward a tree. Here’s where it gets interesting. Question: what do most drivers do in this situation? Answer: stare at the tree and slam on the brakes. Follow-up question: in which direction does a car go? Answer: in the direction the driver is looking. The point is, if you want to avoid the tree, keep your eyes focused on the clear path where you want your car to go - not at the tree!
Those distracting trees in financial planning
This was an epiphany for me, and it reminded me of how it applies to financial planning and investing. But there are a number of "trees" that can distract an investor's focus. Here are some of the more common ones:
- Chasing poor money-making schemes.
- Allowing market disruptions to throw them off a disciplined investment course.
- Focusing solely on investment performance without understanding how it impacts the ability to reach retirement and other goals.
- Fretting over what the stock market does every day. Even in good times, investors can get distracted by the lure of quick profits in a rising market.
If you think about it, this is how most of Wall Street attracts clients - the lure of hot investment performance, complex yet mysterious money-making schemes and confusing statistics, so it's no wonder why this is where people focus - they've been trained this way! Yet by focusing on pages of confusing statistics, it's likely an investor will not reach important goals.
The safe course
So if we shouldn't get distracted by watching the stock market, where should we focus? What is the "clear path" that we should be watching and heading for? Successful financial planning requires clients to focus on two things: 1) defining goals that provide deep personal value, and 2) applying energy only to things you can control (and not wasting energy on things you cannot control). Here some things you can focus on to stay headed in the right direction.
- Discuss your personal values and why they're important to you.
- Articulate financial goals that bring special meaning to you.
- Save money toward your goals, consistently.
- Use a sound investment strategy.
Your values are the foundation of your character, and meaningful goals that reflect your values keep you motivated to work and save. Money and values are intertwined, and by defining your financial goals based on your values, you'll be more satisfied as you work toward them.
Underlying all of this is to use a sound, simple investment strategy based on unbiased and rigorous research, not marketing materials designed to sell investment products. Think about it this way: there are four basic asset classes you can invest in - stocks, fixed income, real estate and commodities (including precious metals). Yet there are tens of thousands of investment vehicles based on these four asset classes, each with their own expenses and story, and there are thousands of investment strategies. A sound investment strategy should be easy to understand and be free of hidden fees and expenses.
By utilizing the proper investment strategy you'll have the confidence you need to spend your energy on defining your values and goals, and finding ways to save toward your goals, while avoiding distractions that can throw you off course.