I’ve never been a fan of New Years resolutions. There are 364 other great days available to start improving on something, so why waste it? I understand why people get behind it with the fresh start feel of a new year, but it rarely works out.
Typical resolutions are big ideas devoid of specifics. You see a lot of things like eat healthier, lose weight, and save more money. All great goals, and I’ve covered this before, but its generic.
I came across an Inc. article on goal setting worth reading. The article does a great job explaining how to reach goals in general. But it covers something specific to investing with benchmarks.
The S&P 500 is a benchmark, as is the Dow. In retirement planning, we put a benchmark on our expected returns.
Benchmarks are the worst thing that ever happened to today’s investor. I say this only half serious, because in some perverted way benchmarks are necessary until our minds twist it into a yearly test of pass/fail.
For example, in retirement planning we set a goal to have Z dollars in retirement, by saving Y dollars per month, while earning X% returns. The problem is we have no control over the returns. In other words, we set a fictitious benchmark, that we expect to meet each and every year.
Yes, we can invest in a way that may get us the returns we want, but it’s hardly guaranteed. Earning 7% or 8% over the course of many years is certainly plausible, but doing it every year is laughable. Yet, that’s what many investors expect.
Rather than understand it won’t happen every year, many investors see it as though their plan failed. At some point, their expectations changed from an average 8% return to an annual 8% return. Once that happens, they ditch their plan the first year it fails.
There’s one lesson I learned from Buffett a long time ago. He never set out to beat the S&P 500 every year. He’s done a great job despite his lack of trying. The first time he failed to beat the S&P was in 1967. Three years into running Berkshire Hathaway and he falls short by about 20%. History would tell a much different story had Buffett scrapped his plan back then.
- How To Think – Farnam Street
- No Time to Invest? Try Passive Investing – Monevator
- Just Look the Other Way – M. Housel
- Why Own Bonds in a Portfolio? – A Wealth of Common Sense
- Stock Picking Will Never Die – BloombergView
- Real Danger of Hot Stocks – Financial Planning
- Easy Way to Get Rich: Buy the Most Hated Stocks – Marketwatch
- Investment Lessons From 2014 – L. Swedroe
- Yes, the Federal Reserve has Enormous Power Over Who is President – Washington Post