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How are you doing financially? Are you ok? The answers, your answers , form the frame around how you view your state of wealth. How you fared in the past year will weigh heavily on how you feel about the current year. While it’s good to learn from recent experience, you don’t want to learn too much!
One of the most pervasive and dangerous tendencies we see in successful individuals is focusing on changes in wealth from arbitrary points in time. Particularly in the beginning part of the year, investors look back at performance from the previous year.
Look at your Starting Point, not your Highest Point
Good or bad, one year hardly amounts to a blip in your long-term plan. The problem arises when the inevitable bad week, month, or year arises. Many investors measure change from the highest value point instead of where you started. This takes place with all types of assets.
Remember back in 2006 when residential real estate prices started to decline? Many individuals were walking around talking about their home values declining by 30, 40, or 50%. That may have been true if measured from the peak values in late 2005 or so, but likely not true based on the price they paid the house for years earlier. Their state of wealth was anchored to the top value, not the beginning value.
Put Perspective on Negative Emotions
One of my early mentors was fond of saying “the downside hurts more than the upside helps.” What he meant was that all of us are far more sensitive to the pain of even temporary loss, than we are to the joy created by gain. Negative emotions are stronger than positive emotions.
Over the past 50 years, the broad U.S. stock market (S&P 500) is positive only 53% of the trading days. Yep, almost half the days are negative. Even this past year (2017), despite a stellar year for the S&P 500, only 57% of the 251 trading days were positive.
Related: How to Achieve Superior Outcomes
If you are going to view your state of wealth by a single days’ performance in the market, you are heading for disappointment.
Use a Broader Lens
Your state of wealth is best viewed from a somewhat broader lens; one that looks at where you started and where you want to go. What really impacts how you feel about your state of wealth? Is it regret?
Regret can be a very powerful negative force. Often, investors construct scenarios in their mind about what might have happened instead of what actually happened.
Building wealth depends much more on the inves tor than the invest ment. It’s simple, but it’s not easy.