It’s simple, what you focus on determines where you go. Consider the following tips about focus. Are you a downhill skier? Never look at the tips of your skis. Always look ahead and anticipate your next turn. Do you ride a mountain bike downhill? Don’t look at your front wheel. Visualize the trajectory ahead of you. You ride a road bike through a set of hairpin turns? Don’t worry about turning the handlebar. Focus instead on visualizing your trajectory through each hairpin.
In essence, don’t just look where you are going, focus on where you want to go. Failing to do this can get you into trouble. The sitcom Frasier has a perfect example of this process at work in an episode where Frasier learns to ride a bicycle. If you haven’t seen it, I highly recommend you watch it on youtube. Fraser is afraid of hitting a sycamore on his path. But precisely because he focuses on the sycamore, he panics and keeps crashing into it. When he finally learns to avoid the sycamore, his colleague Julia warns him about a big mailbox, and you can guess what happens next.
While we may laugh at Fraser’s misadventures, we all know how that feels. When it comes to investing, we are all subject to the same psychology. We tend to focus too much on short term performance, like monthly or quarterly market returns, while our goals may be 10 or more years from now. The anxiety brought about by this focus on short term performance leads to bad decisions. And we hit the mailbox.
Financial commentators often act like Julia in Fraser’s, they play on our worries. Take the recent talks about renewed market volatility because of trade negotiations. Should we get out of stocks now that prices have dropped? And buy stocks again when the market goes back up? That does not sound like a good recipe for investment returns. Do we even know the effect that trade negotiations will have for our goals? Unlikely. Acting on this type of beliefs is speculation, not investing.
The reality is that volatility has been part of the stock market since we have recorded data. And why not? Markets rewards risk taking.
So should we do nothing? For most investors the answer is YES. If the recent volatility is giving you anxiety, go back to principles. Why do you hold the portfolio that you hold? Go back to your investment policy statement. Are your objectives still current or has something changed? Do your investment guidelines still apply?
Oh wait, do you know what an investment policy statement is? If not, that’s your real problem. Many investors hold a hodgepodge of investments based on suggestions from coworkers, relatives, neighbors, or a self-professed financial guru. They never really stopped to seriously think about WHY they hold such an allocation. Start with why, identify your goals and build a set of investment guidelines around them, taking into account your ability to take risk. Your values, goals, and risk tolerance are the foundations of your investment guidelines, or the investment policy statement. Write it down. If your portfolio is aligned to your investment policy statement, you are directing your focus to what really matters, your long term goals. Short term performance is just part of the process, not necessarily a reason for change.
Find your focus, start working your own investment guidelines today! Download our guide to investing to learn more about our approach.
Until next time.
Massi De Santis is an Austin, TX fee-only financial planner. DESMO Wealth Advisors, LLC provides objective financial planning and investment management to help clients organize, grow and protect their resources throughout their lives. As a fee-only, fiduciary, and independent financial advisor, Massi De Santis is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.
