A big mistake every investor makes is trying to control things that are uncontrollable. They try to figure out where the market is going. They try to predict the economy. They try to find the best basket of funds that gives the best returns possible. They try to find the perfect stock.
When you spend all your time trying to optimize for the perfect outcome, and the results you want don’t materialize, you’re back at square one. Then you start the process all over. Investing isn’t about perfection because every year offers up a new best way to invest. There’s one problem. You don’t find out until after the year ends.
The blatant example of this is when investors chase returns. They jump from fund to fund looking for the best performer every year only to get one of the worst. You’ll drive yourself nuts doing this and your savings will suffer.
When you only focus on next years returns you lose sight of what matters – your long term returns. So you don’t need great returns every year. You need good enough returns. And you need to avoid terrible returns.
This doesn’t mean it’s entirely out of your hands. There are things you can do to nudge your results in the right direction. In other words, investing is about focusing on what you can control and avoiding what you can’t.
Instead of obsessing over returns, the stock market, the economy, inflation, interest rates, and taxes, it’s best to focus on things you control:
You can save more money instead of expecting higher returns because both get you to the same destination and how much you save is the only thing you control.
You should save on a regular basis, like every single paycheck.
You can do that by automating deposits so you never forget.
You can use retirement accounts and other tax advantaged accounts to do it.
You can start with your 401k because sometimes employers match what you put in and that’s free money you can’t pass up.
You can save more often by starting earlier and taking full advantage of time.
You can allocate your money in a way that gives you the best chance of earning good enough returns over the long term by owning more stocks then bonds.
You can increase your odds more by diversifying into international and emerging markets.
You can focus on lowering your costs because every dollar you don’t spend is one more dollar compounding toward your goals.
You can easily to do this by being less active – trading less.
You can also do it by taking two seconds to compare expense ratios of similar funds.
You should avoid big mistakes that lead to big losses.
You can do that by being on your best behavior because 90% of investing is about managing yourself, not your money.
You can do this by paying less attention to financial news and more attention to anything else.
You can also do it by doing nothing more often.
You can stop letting your emotions be your guide.
You can understand that sometimes it takes more than a year to see good results – sometimes you have to suffer through a few bad years to get to the good and great years.
You can recognize bear markets are great times to invest because they always lead to bull markets.
You can do this by always considering valuation.
You can invest more when valuations are low because lower valued markets perform better then any other over the long term.
You can use the existing tax code in your favor to get the best after-tax return possible.
You can learn from your investing mistakes so you don’t repeat them.
You can continue your education by learning from the great investing minds that came before you and applying it to your own life.
