From my experience working with clients, people have a tendency to focus a great deal of their attention on items out of their control. Three such topics are discussing the stock market, investment performance and expectations about governmental actions (often tax policy) which could impact finances. My belief is all three of these items are virtually entirely out of your control. Short-term stock and bond market movements are based as much on emotions and guesses as on rational analyses, leaving these movements out of control of individuals. Investment performance is largely a product of these market movements rendering them largely out of your control. We have the opportunity to impact governmental action by voting every couple years and by openly expressing our opinions, but do not have direct control of this either. Yet, in my experience, more time is spent discussing and considering these three topics than all other financial topics combined. Similar to the Pareto principle (80% of effort is put into items producing only 20% percent of results), a wildly disproportionate amount of people's financial effort and concerns are spent on items which produce only a very small amount of total result.
My strong belief is that you should try as much as possible to refocus on items within your control. Your financial situation can be impacted far greater by focusing on earning potential (e.g. career development, continuing education) than on stock market performance. Greater wealth can be made by putting effort into really understanding your cash flow (a comparison of income and expenses) and how that cash flow supports your values and goals than by understanding how your investment performance occurs. Spending time really understanding your goals and how to achieve those goals will have far more impact on use of financial assets the way you hope to than spending time concerned with governmental action and how much of your money is lost to taxation.
It is not my goal to convince you not to think about the uncontrollable items at all, but let us mix the 80/20 rule up. Spend a greater deal of time focusing on items that you can control and that will have significant impact on your wealth, and far less time and effort on the uncontrollable. The long term impact on your wealth and financial health will be dramatic.
A short word on wealth.
In this post, I have used the word "wealth" several times. It is important that I define how I use the word wealth as it is likely different than many people will assume. I do not assume wealth to be measured by your bank accounts, net worth or money stuffed in the mattress. I define wealth in terms of happiness and being able to achieve those goals that you most hope to and that best support your values. It has been shown that, after reaching a certain level of basic comfort, more money does not result in greater happiness. In fact, in my observation, often people with more money display a greater deal of fear and concern about their finances than individuals with far more tenuous financial situations. Therefore, pursuing greater happiness wealth seems are far worthier goal than financial wealth.
Posted by Nathan Gehring at 12:33 PM