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You know what financial liquidity represents within your life, but what about mental liquidity?
Mental liquidity is the ability to change direction if needed along the way. Mental liquidity is represented by how quickly you can let go of beliefs that may no longer hold true. In a nutshell, mental liquidity means changing your mind.
Think about how often you’ve changed your mind in the past. Were your previous convictions and beliefs wrong? Why did they change? Now consider how your current beliefs might change in the future. Based on the past, isn’t it reasonable to think what you believe today could change?
One reason you might change your mind is the availability of new information. This occurs every day within the financial markets. The global markets process new information, and this helps set market prices.
Sometimes, your deeply held beliefs and convictions disregard widely known facts that could dispel these beliefs. The blind spots created by these misguided convictions can be dangerous since your decisions are heavily influenced by your beliefs.
Many investors find it painful to let go of beliefs that may no longer be true. It’s difficult to change because this means acknowledging that you were wrong in the past and the certainty you held about your beliefs was merely an illusion.
Your beliefs are your beliefs because they are advantageous to you, rather than because they are necessarily true. Acting on errant beliefs can be particularly costly within the investing realm.
A few years ago, we met with a prospective client who believed that stocks were overpriced and high yield bonds were a bargain. These beliefs colored all of his investment decisions. He eventually decided to work with another firm that promised double digit annual returns derived solely from bonds. I thought of him a few times over the past couple years as the bond market suffered through the worst returns on record. Hopefully his convictions changed.
One of the cornerstones of mental liquidity is the willingness to change your mind when needed. This requires an openness to new ideas. This openness can allow you to weigh how “old wisdom” and new ideas might work together for your benefit.
At the core of mental liquidity is the way you deal with uncertainty. Your prior experiences are the primary basis for how you imagine possible outcomes, but this is not always the best path. As Dimensional founder David Booth says, “Plan for what can happen, rather than trying to predict what will happen.”
Mental liquidity along with financial liquidity provide you with much needed flexibility. In a rapidly changing world, being able to adjust your approach along the way can make all the difference.
Related: How Much Is Happiness Worth to You?