In theory, it seems like investing should be easy. After all, we have access to a lot of information. How could we possibly fail at investing? We should all be experts, right?
But there’s one big problem with this theory. No matter the amount information we have, we’re still human. Sometimes information, even really good information, isn’t enough to keep us from reacting in the moment when we’d be much better off sticking with our plans.
I see it happen most often when investors assume they can control things that are really outside of their control. For instance, we can’t control:
- What the markets do
- What others around us do
- What happens tomorrow
Even though our rational selves tell us we can’t control these things, a lot of investors still try. They assume that if they can control these things, they’ll become successful investors. However, if we go down this path, we’re much more likely to end up frustrated and disappointed, both emotions that can trigger bad financial decisions. But what happens when we focus on the things we can control?
By taking the things we can’t control off the table, we create the opportunity to focus on the things we can control:
- Our asset allocation
- Our behavior in good and bad markets
In the big scheme of things, this list may seem like small potatoes, but let’s break down why being able to control each one is so important for investors.
1. Asset Allocation
In 1986, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, published a now-famous study that established why asset allocation matters. They found an investor’s asset allocation decision was responsible for 88 percent of a diversified portfolio’s return patterns over time. That’s a hard number to ignore, and we have the control when it comes to asset allocation.
2. Behavior in Good and Bad Markets
It can be so hard to behave. When the talking heads on TV are shouting, it feels like we’re being really stupid if we don’t do SOMETHING. However, by reacting to what’s happening right now, we’re rarely acting in a way that’s good for our long-term financial success. As a result, we end up doing something dumb like selling at a market low or buying at a market high. We can prepare for the ups and downs we’ll experience by establishing a disciplined routine to help us weigh if we’re doing what we planned to do or reacting to the latest news.
As investors, we do have control, but we need to focus on the things we can actually control to have an impact. We can’t control the markets, but we can control ourselves, and once we understand that fact we’re that much closer to reaching our investing goals.