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As you navigate your way through life, you are consciously or unconsciously acting upon certain core beliefs. You likely have hundreds of opinions, ideas, and beliefs, but only a few core principles that drive your actions.
What do you believe? I’ll go first.
Personal economics is centered around trade-offs. Your financial means are finite, but your wants are infinite.
Personal economics revolves around scarcity and the choices you make. If you choose to devote financial resources toward one thing, you can’t use the same resources toward something else.
You shouldn’t try to forecast the future or live in the past. Economic and financial market forecasting is what many investors depend upon, but forecasting the future isn’t reliable. Trying to predict the future amounts to nothing more than a series of wishes and worries. Likewise, carrying around baggage from past financial miscues is a drag on your financial future.
Your plans will rarely work out exactly as you planned. Financial planning is an ongoing process and requires course corrections along the way. There’s a difference between decisions you make that don’t end up working out and mistakes. Understanding this distinction is key to your financial success.
You never know how you will react to adversity until you face it. Experience only happens in the rear view mirror. Your expectations for how decisions will work out sometimes prove unreliable. How you act or react to poor choices is a huge factor in your long-term financial success.
You respond to incentives and so does everyone else. You buy things that are on sale. You make choices because of some financial incentive to take action today instead of tomorrow. The key is to ensure that your actions are purposeful and aligned with your personal financial goals.
You can make good decisions and still have poor outcomes. Investing is full of probabilities and the probabilities of success are never 100%. Some good decisions end up not working out. Risk just works that way.
You should expect both calm and crazy times. The economy and financial markets go in cycles. Stable and calm sometimes transition into unstable and crazy. The good news is you don’t have to worry because these cycles don’t continue forever. As author Morgan Housel puts it, “Nothing too good or too bad lasts indefinitely.”
Optimism is the only realism. You have to be able to focus on the sunshine and not just the dark clouds to achieve your financial goals. Human innovation continues to drive progress. Being a successful investor requires that you believe the future will be greater than the past.
Ultimately, your beliefs drive your behavior and your behavior is the dominant determinant of long-term financial success. Try to be aware of your behavior and biases. Embrace the power of unbiased advice and feedback to help you in your journey. Start there.