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It’s incredibly dangerous to look at personal finance solely through the lens of investment returns, but that’s exactly what most people do.
The real reason many investors focus on returns is simple: their expectations and aspirations exceed their financial preparations.
Higher investment returns are viewed as a quick and painless fix.
The rationale for folks talking about investments at cocktail parties and other events is mostly because of social comparison. You know, keeping up with the Joneses, or in the parlance of the young people today, FOMO (fear of missing out).
Investors constantly seek higher returns because they don’t have a good understanding of enough.
Don’t Risk What You Have
Morgan Housel writes in his excellent new book The Psychology of Money, “There is no reason to risk what you have and need for what you don’t have and don’t need.”
For those addicted to higher returns, there is never enough. High returns are always bested by even higher returns.
In my experience, it’s easy for the unquenchable thirst for higher returns to push over to the point of regret. I have seen this many times.
In very broad terms, riskier investments often render higher long-term returns. This doesn’t mean, however, that the higher risk is worth taking in your particular circumstances.
Your Investment Game
It’s crucial to comprehend the specific investment game that you are playing and how this differs from most other investors. It’s also important to recognize that the time horizon of other investors may not match your time horizon.
About 90% of the daily trading volume in the stock market comes from large institutional investors. You, as an individual investor very likely don’t want the same things these institutional investors want.
Creating and “fleshing out” your own particular money perspective, your own particular money story, will help you avoid reacting to short-term market fluctuations that have little to do with your long-term aspirations.
Routine Surprises
In reality, money decisions are made using your own special calculator concerning risk. The problem is risk occurs in the future and is difficult to measure in any meaningful way.
We live in a world where surprises happen routinely. The primary lesson to learn from these surprises is that no one knows precisely what will happen next. There are plenty of folks willing to guess but that’s all it is. Investment decisions often are based on these guesses.
Constantly chasing higher investment returns likely won’t make you more satisfied with the outcome. In fact, it’s very likely to create even higher levels of unhappiness.
Your financial future is much larger than that single variable. Start there.