Is Your Financial Life Sustainable?

Is your financial life sustainable? Isn’t that the essential question underlying all of your financial decisions? Will you have the money to support your lifestyle, including living cost increases, for the long-term?

How to Maintain a Sustainable Financial Lifestyle

Are you following an investment approach aimed at ‘maximizing returns’ for next quarter, when in reality the next 20 years or more is what matters? Ultimately, you need the ‘best returns’ that can be sustained for the longest period of time, not simply the ‘best returns’ for today.

Perhaps it’s counter-intuitive, but sometimes unremarkable investment returns that can be sustained win out in the long run. Slow and boring often beats fast and exciting. As best-selling author Morgan Housel writes, “You can be an extraordinary investor by earning average returns for an above-average period of time.”

The true purpose of personal financial planning isn’t about ‘maximizing’ short-term returns, it’s about producing superior real life outcomes for the long-term. Financial planning provides a roadmap that you can follow and act upon. One of the principles of financial planning is that you achieve good outcomes by ‘acting’ on your plan, not ‘reacting’ to short-term market noise.

If you had a crystal ball and knew exactly what the future might look like, you could make investment choices accordingly. However, while the financial markets can be volatile in the short-term and fluctuate, human emotions fluctuate even more. In reality, how the stock market behaves isn’t the issue; how you behave matters much more.

Making Uncertainty Work for You

Dimensional Founder David Booth recently wrote in Fortune, “Uncertainty is underrated.” While that may not be what you want to hear, uncertainty is the reason you can achieve premium returns in the stock market over the long-run.

Uncertainty requires that you simultaneously manage your emotions and observable risks. Every financial choice you make involves positives as well as potential negatives. Uncertainty is always present.

Because of uncertainty, patience is a superpower in your financial life. There will inevitably be periods of time where your investment portfolio disappoints. The broad stock market has positive returns in only 54% of the trading days, but about 75% of the calendar years. Ultimately, you need to stick around and stay invested in order to earn long-term returns.

It’s a mistake to focus entirely on trying to avoid temporary market declines. The stock market has experienced double-digit percentage declines in most of the calendar years since 1928. If you fret too much over temporary draw-downs, you’ll likely become frustrated and end up out of the market when the inevitable advances occur.

Investing: Be in it for the Long Haul

Staying invested is the most reliable way to create a sustainable financial life.

Recognizing that investing is more of a marathon than a sprint can be a big step toward a sustainable financial life. Upticks in stock market volatility might not be what you like, but it’s the reality of investing. Markets go up and down, not up and up.

The past few years likely reminded you how important the purchasing power of money is when making financial decisions. Building a sustainable financial life requires that you have money habits that focus on growing your wealth in order to keep up with inflation.

Related: The Pivot Points of Your Finances