Trending
Think about the last time you went on a trip. What excited you more, where you were going or how you planned to get there?
When it comes to investing, it’s easy to get this backward. You forget the destination and become enamored with investments, which are, after all, merely a mode of transportation. Investments are like cars, trains, or planes – they perform a function, but the place you’re going is what really matters.
Perhaps you want to build a financial future that is sustainable throughout your retirement years; maybe you are saving to buy a vacation cottage; or even a desire to leave a legacy for your children and grandchildren. All of these are destinations that require planning.
99% of the financial media coverage each day is oriented toward investments and predictions about how they might perform. This certainly doesn’t help.
What Are Your Investment Stories?
One reason for this misplaced focus can be traced back to how we make decisions. Investors buy into captivating narratives or stories about particular investments and the benefits they potentially provide. The piqued emotional state from these stories creates fertile ground for investment product salespeople to work their magic.
Investment stories are appealing because we have limited time and the subject matter is confusing and complicated. Stories also can drown out competing messages from others that don’t align with our beliefs. This can be particularly dangerous.
Stories often over simplify reality so that the storyline can be tidy and neat. The financial markets, however, aren’t usually tidy and neat. Sometimes, the stories appeal to us because they seem to offer solutions to things outside our control.
What’s the Plot?
There’s usually a big difference between a good story and a good investment. It’s easy to hear the positive parts of a story and ignore the negative. Just because you like a story about an investment doesn’t translate into the investment being a fit for your financial life.
There are always going to be interesting stories, but investing success comes from sticking to your story – what matters to you.
It’s incredibly difficult to disentangle emotions from financial decision making and compelling stories about investments make this even harder. A fix for this is the Pareto Principle--the 80/20 Rule. Expend 80% of your cognitive and emotional energy on the destination and just 20% on the investments.
Related: Is It Time to Change Your Portfolio