April 27, 2018

Control What You Can

  • Where is the stock market going?
  • Is the Fed going to increase interest rates?
  • What is happening in China?
  • Where are oil prices headed?
There is plenty of daily media attention given to these questions as well as explanations as to why certain things happened. But that is all history. These are the wrong questions to be asking regarding your personal finances because the answers are unknowable. The impact on your financial life is uncertain and the outcomes are beyond your control. You might as well stop worrying about them.

What you need to focus on is what you can control. So I encourage you to ask yourself the following questions instead:

Does my financial plan have a high probability of success?

Although it’s impossible to predict what may happen over your lifetime, it’s still important to create a plan based on the information available to you today. A good plan will recognize the uncertainty in markets and life and be designed to work even in poor scenarios. It will also anticipate potential problems and protect against them. But don’t get too hung up on your initial plan – it will most likely need adjustments over time due to changes in markets and your life.

Am I properly diversified?

While you can never protect yourself from (sometimes large) temporary declines in the broad stock market, diversifying your portfolio across many types of investments can smooth out the ups and downs and prevent you from being overexposed to a single company or asset class.

Am I minimizing costs and taxes?

This seems obvious – the less you pay in expenses, the more money you keep in your own pocket. I’m not just talking about expense ratios. It’s also important to consider the “hidden” costs that are often overlooked such as trading costs and taxes. You can minimize trading costs and taxes by investing in mutual funds with low turnover.

Am I confident I will be able to stick with this plan and investment portfolio no matter what?

Although this is the hardest to quantify, it is the most important item on this list. Unfortunately, it’s common for investors to sabotage their perfectly good financial plans and investment portfolios by behaving inappropriately. This behavior shows up in many ways, but the most common type is “performance chasing” (shifting your investments around based on past performance) and “panic selling” (selling during a market decline). If you are going to have any chance of financial success, it’s essential to avoid these types of emotional decisions. You can’t choose your external circumstances, but you can always choose how you respond to them.

If you answered “yes” to all four of these questions, then you have stacked the odds in your favor. All you can do from there is accept events as they unfold and adjust your plan as necessary to make sure you always maintain your financial independence.