Be a Control Freak
The Investing Series continues!Last week, we left off with the notion that, in order to win, you have to be boring. This week, we’ll talk about how it’s also important to be a control freak. (You’re going to be so popular!)
Determine What You Can Control
As an investor, you’ll be best served by focusing only on the things you can control. When you zero in on those components—ignoring stuff that you have no control over—that’s when you position yourself to win. Let’s look at the components, in descending order of how much control we have over them:
Everyone has different financial priorities and budgets but, if a priority is investing, you have absolute control over when you start—even if it's just $50 a month to get things rolling.
You have full control over allocation, too. Last week, we talked about the importance of diversification. Maybe you choose 50% in stocks, 25% in bonds and 25% cash—totally up to you!
You’re also in control over how much you invest. Obviously, your budget will affect how much money you have available to invest—maybe you’ve got other financial priorities—but the point is, you decide what to invest. (If you’re reading this post, chances are, you can invest more than zero to get started.)
Finally, there’s return on investment (obviously a big component of your overall investment performance). There are several factors that affect your rate of return, so what aspects can you control?
You actually have a lot of control over cost. You’ll see that some funds are much less expensive than equivalent funds, simply because they have lower associated costs.You can also avoid the expense of an advisor by choosing your own investments. That advisor, by the way, is essentially doing exactly what we’re talking about in this series—which is allocating your money, based on your risk profile, and then letting things sit. If you’re considering an investment advisor, just be sure to look at the value that they may (or may not) be providing, and the cost to you.
You can’t directly control taxes (beyond your vote). What you can control, though, is your exposure to taxes. With some investment vehicles, you have better control over how your investment is taxed—for example with 401ks or Roth IRAs. In fact, simply by holding an investment (not selling it), you have complete control over your tax situation because you are avoiding a taxable event.
Over the long haul, say 20+ years, market performance is based on the earnings and growth of the underlying companies. But, if you look at a shorter time span—let’s say ten years—what really drives market performance is market sentiment, or people’s desire to invest in the market.You can’t control market sentiment. Current events, politics and decisions by the Fed can influence how people feel about investing (and whether or not they do!). So, with no control over the market performance, what do you do about it? The answer you’re looking for is nothing!
Focus On What You Can Control
In summary, if you want to invest like a pro, keep your focus on the things you can control—time, allocation, amount, costs and taxes! Then just let market performance do its thing. You'll worry less, and your investments will outperform the vast majority of investors.
If you can’t wait until next week for more whiteboard wisdom, subscribe to our YouTube channel.