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We have it all worked out inside our heads. Everyone has a story about the financial world and its underpinnings. The problem is these narratives often push us away from where we need to be.
Some investors believe that the stock market is overpriced and inflation is on the rise. Others see the fiscal situation in the U.S. as untenable and unsustainable. Whatever the story might be, we often treat it as the absolute truth.
The genesis of these stories usually can be traced back to the financial media or our own pre-dispositions and biases. Sometimes these stories are little more than personal economic fairy tales that play over and over in our heads.
What Stories Are You Telling Yourself?
The stories that we tell ourselves enable us to make some sense of the wacky world we live in. But if the embedded story is in conflict with reality, our ability to make smart decisions suffers.
Our confidence in the stories being right tends to make us immune to ideas that fall outside the storylines. Broad narratives are usually one size fits all and don’t allow for personalization or consideration of particular circumstances.
When the stories that we carry around are mostly fables, these narratives create a contour for making choices that can be dangerous and limiting. We often hear clients say, “I know this (inflation, market correction, etc.) will happen…when in fact, the future isn’t knowable by anyone.
Preparation Not Prediction
We stress to clients that financial planning is concerned about preparation, not prediction. Building a sustainable financial life isn’t dependent upon trying to outguess what happens next. Since predicting the future is impossible, the most important thing is to create the next step on your path and then reassess.
The grand majority of wealth managers/financial advisors spend copious amounts of time accumulating data in order to forecast the future. The problem is, there’s no evidence this actually works. The desire to know the future is so strong, however, we are left vulnerable to believing predictions.
The issue is we want every decision that we make to align with random short-term events. Investing doesn’t work like that. The bargain is this; in order to obtain well above inflation long-term returns, there’s a penalty, sometimes a big one, for wanting the returns sooner. If you can’t “stay in your seat”, you will likely have poor investment outcomes.
Consider the Reasonableness
I read an interesting article recently on Laura Wasser, a well-known divorce lawyer for the rich and famous. She said that when deciding to take on a case she considers the reasonableness of the potential client. She said she can control certain things but only the client can control their reasonableness. It’s an important limiting factor.
Trying to out maneuver everything that comes your way is unreasonable. The broad economy is always about cycles; the markets go up and they retreat. Inflation spikes come and go; political leaders are transitory. It’s wholly unreasonable to think you can predict the economy, the markets, inflation, politics, etc.
Stories can be either harmful or helpful to accomplishing what matters most to us. Many times, particularly within the investment realm, clinging to popular, (but mostly false), narratives lead to unforced errors. Place an emphasis on reality and reasonableness in your financial life. Start there.
Related: What Does Risk Feel Like?