It’s important, periodically, to pause and reflect. Unfortunately, our fast-paced world tends to conspire against our opportunities to do this; there’s always the next activity to plan, the next opportunity to explore, the next commitment to fulfill. But at certain points, we all need a little time, now and then, to back up from the trees and try to take in a view of the forest.
In our work with clients, this is especially important, because when we lose sight of the big picture, the quality of our guidance suffers. I recently had the opportunity to read a collection of essays by David Booth, founder and chairman of Dimensional Fund Advisors. Booth puts his finger on some important concepts that are as broad in their application as they are timeless in their validity. Here are just a few of the topics, presented in no particular order.
Compounding—In Finance and in Life
When you think about it, compounding is a true marvel; Albert Einstein called it “the eighth wonder of the world.” And anyone who has any experience at all in the financial world knows the importance of having your money work for you over time, whether through accumulated interest and dividends or growth in value.
But there’s another type of compounding that we need to be conscious of, as well: compounding in life experience—call it “wisdom.” When we accumulate experiences and learning over time, that’s a type of compounding, too. In fact, it may be more important to make sure we’re compounding wisdom than compounding finances—after all, the more wisdom we accumulate, the better our chances of making wise decisions in every area of life, including finance and investing.
Handling Uncertainty
We all know that the financial markets are uncertain—in fact, uncertainty is part of what creates opportunities. But people deal with uncertainty in different ways, don’t they? Possibly the most important step in handling uncertainty constructively—whether in investing or in life—is embracing it. After all, none of us are able to read tomorrow’s headlines. The future will always remain unknown, and our ability to cope with it depends on recognizing that fundamental principle. Next, it’s important to have a plan. While it is almost certain that circumstances will force us to adapt or change our plan, having a plan in place as a starting point is essential. And speaking of plans, it is vital that any plan is built around controlling what can be controlled, rather than trying to control things that no one can control. For example, we can’t control the short-term direction of market pricing, but we can control the amount of risk we’re willing to accept. We can’t control the geopolitical factors that might affect one or more of our investments, but we can control the diversification of our assets, so that no single asset type makes up an inappropriate percentage of our total holdings. Finally, once we’ve established our plan, the best way to manage the ongoing ins and outs of uncertainty is to stick with the plan for the long haul. Rather than reacting to every short-term event that arises, take the long view, recognizing that as life continues to present us with uncertainties, we can make the adjustment necessary to allow us to maintain an even keel over the long haul.
Forecasts, Wishes, and Worries
Often, when the government releases new figures on employment or inflation or some other economic statistic, we are treated to a flurry of opinions and thoughts about what this means for the markets. Many of these statements are framed as “forecasts,” but they are really more like opinions or even wishes. That’s because a forecast involves “a high degree of confidence in an outcome based on well-proven models.” Tomorrow’s weather forecast, for example, is likely to be substantially accurate, because by studying meteorological patterns over time, the folks who forecast weather have developed pretty reliable data. But “forecasting” when the Dow will hit a certain number, or when inflation will fall to a certain level, or which of a handful of stocks will perform the best over the next year does not share the same characteristics as a weather forecast. In fact, such statements typically are more of a wish—or a worry. The good news, however, is that we don’t have to base our financial strategy on the accuracy or inaccuracy of wishes and worries. Instead, by establishing a long-term plan that matches our tolerance for risk and incorporates broad diversification across asset types, we can allow the observable long-term trend of the financial markets to work for us, rather than against us.
Volatility
Most of us understand that volatility is a part of the financial markets. Volatility—which is really just another way of saying “the pace of change”—can go both up and down. The same is true of life in general, isn’t it? Sometimes, things just seem to get better and better. And then, the unexpected happens, and things seems like they’re headed south. When volatility happens, it’s important to remember that, as mentioned above, change is what creates opportunity. If there were never any volatility, there would also be no opportunities for substantial gains. In investing and in life, change is inevitable, and having a plan in place is our best strategy for coping with volatility constructively. And remember: the purpose of a plan—whether in finance or in life—is not to eliminate the possibility of change (volatility); it’s to provide a platform for responding rationally, rather than emotionally.
At Curio, we value the vision that results from inquiry. When you look at your financial picture, what do you see? How is your financial plan enhancing your approach to life? We’d love to hear from you. To start a conversation, please get in touch with us.
