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A client recently told me that we’d taught him many valuable lessons in the 20 years we’d been working with him. But by far, he said, the most valuable thing he’d learned was a general attitude toward investing: the philosophy of not freaking out.
The philosophy of not freaking out has two principles: (1) Focus on what you can control, and (2) accept that there will be uncertainty with the rest.
You can’t control everything. For instance, you can’t control what genes you have. If you have a family history of heart disease or diabetes, there’s nothing you can do to change that. What you can do is change your diet and exercise habits.
Likewise, when it comes to investing, you can’t control everything. You can’t control interest rates, taxes, or inflation. But you can control how you channel your energy and attention. You can choose to listen to the daily media noise and obsess over every meaningless financial metric. Or you can choose to focus on what really matters: time. You can choose not to think in terms of days, but to think in terms of decades.
People tend to freak out about the stock market’s ups and downs. Those ups and downs are things you can’t control. And it’s impossible to predict whether the market will go up or down in the short term. But over the long term, there are market patterns that tend to repeat themselves.
Here’s a graph depicting the Growth Of Wealth from 1980-2021. This provides a “zoomed-out” perspective of the stock market over several decades. As you can see, the graph has a steep positive slope over time with only a few minor blips. $1 invested at the beginning of 1980 would have grown to over $132 by the end of 2021.
Graph 2 “zooms in” on one of the small blips in Graph 1: the year 2018. 2018 is barely noticeable on the longer-term graph, but when we “zoom in” we see that the market was up, then down, then up again before turning down again sharply to finish the year.
Comparing these two graphs illustrates an important point: the shorter the time frame, the less certain you can be about how the market is going to perform. Conversely, the longer the time frame, the more certain you can be about how the market is going to perform.
If you stay invested over the long term, your investments will achieve positive results. But you can’t achieve long-term positive results without experiencing short-term negative downturns along the way.
Think by the analogy of driving to the store. There are traffic signals along the way. Sometimes the traffic lights will be green, sometimes they’ll be yellow, and other times they’ll be red. If you encounter a couple of red lights along the route, you don’t abandon the trip and go home. You accept the momentary pause in your progress as part of the overall process of getting to where you need to be.
It works the same way with the stock market. Sometimes markets are up, sometimes they’re down. If you encounter a market downturn for a few months, you don’t decide to sell everything. You accept the temporary downturn in your progress as part of the overall process of achieving your long-term financial goals.
That brings us back to the topic of control. Whether the traffic lights are green, yellow, or red is beyond your control. Likewise, whether the market goes up or down over the short term is beyond your control. Over the short term, the market goes up and down in ways that are impossible to predict and impossible to control.
If something is beyond your control, worrying about it does you no good. In fact, it can actually do you harm. It can cause you to make bad decisions—decisions that don’t influence the things that are beyond your control, but instead create the illusion of influencing them.
Sometimes, for instance, people who focus on the short term instead of the long term get trapped in a cycle of buying and selling in response to every daily market metric and every market up and down. This constant buying and selling makes them feel as if they’re controlling the uncontrollable, but in fact, they’re really just distracting themselves from what’s really important: their long-term financial goals.
Ideally, you have to accept the reality that markets go up and down over the short term. Market volatility is a feature, not a bug. You may not like market downturns, but you understand that they are necessary parts of achieving premium returns over time that outpace inflation. And inflation is the real enemy of wealth creation.
Inflation reduces the value of your money; it reduces what your dollar can buy. Inflation is the “silent killer” of wealth because it operates in the background and isn’t necessarily obvious day to day.
The most reliable way of combating inflation is investing in the stock market for the long term. There’s an adage that expresses this approach: “It’s time in the market, not timing the market, that matters.” In other words, you should avoid trying to guess the short-term direction of the market and stay invested for the long-term.
Our best clients are those that stay focused on their long-term financial destination. They stay invested throughout both good markets and not-so-good markets. By concentrating on what they want to accomplish they can filter out the incessant noise of short-term market movements.
The philosophy of not freaking out is about staying focused on your long-term financial goals. Good investors don’t focus on short-term market movements they can’t control, and they don’t fall into the trap of replaying in their minds what happened during longer-term market downturns. They know that ruminating on hard times only ratchets up their fear levels. And they know that the more fearful they are, the harder it will be for them to stay focused on what really matters: their long-term financial destination. If you have money, you already have risk—if nothing else, the risk of losing your money to inflation. If you’re going to have that risk, you might as well stick around to capture the returns. Ready for a real conversation?
Related: What’s a Good Life?