“Know Thyself” is one of the ancient Delphic aphorisms inscribed on the Temple of Apollo at Delphi, Greece. Philosopher Socrates went a step further. He said, “The unexamined life is not worth living.”

We’re not advocating that you guzzle a goblet of hemlock because you’re not a good investor. Let’s not go that far, but attempting to BEAT the market is destructive behavior, and countless billions has been lost in this futile pursuit. Sadly, a generation of investors have been taught to tune in daily to watch the green arrow-red arrow war. It’s a seductive message. Make the right bets and you too can strike it rich. That’s gotta stop.  As entertaining and fun as it looks, these arrows represent your hard earned money. It’s not a game. And it’s not a pursuit in which to engage after watching a cable show. Oh, we watch the shows, too. They’re Interesting shows, hosted by smart people, with great guests presenting provocative ideas. But that’s not the point. The Wall Street machine is informed. Its informed long before you are. It has access to the tools you never will. It runs the show. They know lots of neat stuff, but they don’t know you. And they could care less. To them, investments are blips on a screen. Some candlestick chart to interpret and then pull the trigger. Oh well, it’s not our money, right? Right! Great investors don’t engage in the green arrow-red arrow war. They invest with a singular purpose: to attain their life goals. Those life goals have a price tag. That price tag dictates, in part, the type of investor they need to be. Not want to be. Need to be. Most investors are saving for pretty much the same things in life: buy a house, educate the kids, secure a comfortable retirement. Pretty much in that order, most of the time. If each of those goals represented a bucket (house bucket, education bucket, retirement bucket) doesn’t it make sense that each bucket should have its own strategy, uncoupled from the green arrow-red arrow war?


…does it make any sense to take more risk to try and beat the market?


A house purchase may be five years away; college eighteen years away; and retirement a short thirty-five years away and could last another twenty years on top of that! Each of those buckets should have a different time horizon and price tag attached to it, and different levels of assumed risk and desired rates of return.

Goals Based Investing

Goals are the “why” to the “how” in your financial plan. Goals are the reason you have to know yourself. Your neighbors’ goals mean nothing to you. For instance, “why” we invest is to have a comfortable retirement. “How” we invest, our collective portfolio decisions, depend on time and risk; that is, time until desired achievement of the goal and how much risk we need to take to get there.  NEED is an important distinction here. Goals based planning, when considering the time it will take to get there, will help us determine our required rate of return to achieve the given goal. We may have a desired rate of return, wanting to BEAT the market along the way, but if we can get to our goal comfortably by earning 7% a year on average, does it make any sense to take more risk to try and beat the market? No, it doesn’t.  Are you really willing to sacrifice your goal for a possible (and unlikely) chance to feed your ego by beating the market?

Investor, know thyself

Knowing your own inherent decision making style, biases and behaviors is about knowing who you are as an investor. Knowing the specifics of your goals, how much and how long it will take to realize them, and forming strategic plans to get there, will come to define you as a winning investor. Knowing yourself is eminently superior to knowing which stocks to buy. Removing yourself from the constant green arrow-red arrow war is liberating and productive. Moving to a Passive Make, Active Keep philosophy places the emphasis on the activities and choices that will create long term wealth. By shifting your energy and emphasis to new habits that focus on your own investing behaviors, you will be operating on a level that most cable-charged armchair speculators will never know.


 

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