Mistakes are the best teachers. One does not learn from success. It is desirable to learn vicariously from other people’s failures, but it gets much more firmly seared in when they are your own. — Mohnish Pabrai
Some of life’s mistakes are more costly than others. One may not rear its ugly head until many years down the road, while another is capable of delivering an immediate knockout punch. Money mistakes are able to do both.
Odds are you’ve made some pretty good money decisions, and you’ve made costly mistakes as well. Nobody is immune from mistakes. None of us are smart enough, lucky enough or insightful enough to completely eliminate mistakes from our lives.
But you can take steps to improve yourself as a money steward and investor, and elevate the state of your overall financial wellness by minimizing the frequency and severity of your mistakes, learning important lessons from them and correcting course as necessary.
Not knowing that you’re not in control.
First, the good news. There are so many things that ARE in your control: establishing a reliable budget, your spending habits, how much you contribute to your 401(k) or ROTH, eliminating personal debt, determining the right type of life insurance, and so many other things that can bring you to a higher state of financial wellness.
Now, for the bad. You are not in control of your investment performance. You do not control the markets. You do not possess special skills or powers to make money from money, and you are not a genius. (Apologies to the few bona fide geniuses out there, but you, too, are in the same boat as the rest of us).
When it comes to successful personal finance, nearly 100% of the time your active involvement should be focussed on the things you can control, and not trying to slay the market. Like Don Quixote’s delusional windmill attacks, you, too, will be deprived of your victory.
As an investor, your personal investing paradigm should be based on staying invested over the long haul, not trying to beat the market. Its a unicorn you will rarely see.
Trying to BEAT the market is an act of financial arrogance. Instead, exercise complete control and BE the market. Investing in low cost index funds (mutual funds or ETFs) puts you in the driver’s seat. Understand, you are NOT controlling the performance; rather, you have agreed to accept what the market will earn, with you or without you, and in the process, keep costs, fees and taxes to the minimum.
Wall Street has long known that “markets are efficient,” and that investors are anything but efficient. By perpetuating the “beat the market” myth, investors’ hopes and expectations rise far beyond where they should ever go, and the only antidote is for you to modify potentially destructive human emotional responses and learn to control what you CAN control.
According to the “stopped clock theory,” even a stopped clock can be right twice a day. And just like that broken clock, investors can “beat the market” here and there, but it’s just not a realistic or achievable long term goal. In fact, in the long term, it will destroy you.
Passive investing, investing in index instruments, is a long term strategy to build personal wealth. It is the antithesis of stock picking. Rather, it is more about “being the market” than beating the market. The emphasis is on employing the major themes of successful investing–asset allocation, diversification, cost containment, low turnover and so forth–rather than trying to do the seemingly impossible: consistently picking winners.
The solution is simple: control what you can control (Active Keep), and give control to the markets that will do what they do, with you or without you (Passive Make).
And while all investing involves risk, history and long term results say that you will be much further ahead of those jumpy active traders trying to beat the market.