Trending
Many areas of life benefit from cumulative knowledge: knowledge that increases over time, with new knowledge adding to what was known previously. Some other areas, like investing and personal finance, are impacted mostly by cyclical knowledge: knowledge that repeats itself over and over, often with the same errors that were observed in the past.
As hard as you may want to fit investing into a neat formula, the act of investing involves human emotions and these emotions can’t be easily captured in mathematical models. Investors today make many of the same mistakes that were made 50 or 100 years ago. In some respects, it seems that we haven’t learned much from the past.
Understanding Cyclical Knowledge
If your investment decisions sway with the economic winds of the day, that’s a good example of cyclical knowledge. Detailed market history dating back almost 100 years is readily available, but many investors keep looking for information that might obviate these long-term historical observations.
One reason cyclical knowledge dominates most personal financial decisions can be attributed to reliance on vague beliefs instead of quantifiable truths. In the meme era, things that sound good or look good, must be good. Right?
The behavioral component of financial decision-making can be the most important part. Financial economics is one part science and two parts behavior. The factual history of the financial markets is known, but how you react to that history is the real question.
Your financial choices over time create ‘muscle memory’ that you call on again and again over your life. If your decisions are faulty, you tend to repeat those errors over time. First hand experience is only valuable if you are open to learning from this experience. If you can learn from bad experiences and use them as fuel, these ordeals can be the “greatest teacher” as author Dan Sullivan says.
Making Cumulative Knowledge Work for You
The best way to benefit from cumulative knowledge as you make financial decisions is to think long-term. The deafening noise of financial news, trends, and worries can leave little room for anything else unless your gaze is cast on the long-term.
What have your past experiences taught you about the present time? What decisions worked out well for you? What decisions didn’t work as expected?
Another way to minimize the impact your emotions have on decisions is to focus on what you can control. Ultimately, this requires that you accept the reality of uncertainty and the things you can’t control.
Your objective should be to step back and make investing decisions based on facts, not feelings. Always remember that you are investing for something in the future and what’s happening today is of little importance in that quest. Start there. Ready for a real conversation?
Related: Are You Ready for Retirementville?