Why do we feel the need to compare ourselves to others? The obvious answer is that we feel it provides us a “benchmark” to formulate future choices and behaviors. But why do we allow others to drive our actions? Why not establish our own internal benchmarks and be content with our ability or inability to live up to them? The truth is we can, but it is not easy in today’s modern world, with social media and other information platforms continually distracting us from our path.
In fact, look no further than the investing world for examples of these distractions with the recent price action in companies like AMC, GameStop, digital currencies, and almost the entire technology sector in 2020. While these violent market moves make for great television, the stories are potentially dangerous due to our inclination to compare. Many are lured into taking unnecessary risks when investors compare their results to eye-popping returns in specific market areas. While the upside potential in certain assets is indisputable, so are the downside risks. Understanding how to balance these two dynamics is what makes a great investor. So how can you avoid unhelpful comparisons and strike the perfect financial balance? See below for tips!
Establish Your Own Personal Benchmark
There is no mandate to beat a particular investment benchmark like the Dow Jones, S&P 500, or Nasdaq. In fact, I recommend simplifying things by establishing two easy-to-follow goals: 1) Grow your savings to stay ahead of inflation and 2) Accumulate enough wealth to provide a consistent stream of income for the rest of your life.
So, what amount of risk is necessary to achieve these goals? The answer depends on a few things: how much you intend to spend in retirement, your capacity to save, and how many years you have left before retirement. One general rule of thumb is your anticipated annual cash flow need should not exceed 3-4% of your total investment capital at retirement. While your specific goal may require higher degrees of risk to accomplish, I often find it takes much less risk than people think. **Note: The management of risk increases in importance as you get closer to retirement, as mistakes have more significant consequences due to limited recovery time.
Believe in Your Strategy
There is an old saying, “To succeed, we must first believe we can!” So how does one develop belief? The answer is through action. As investors, we must put in the work to build trust in our strategy and confidence in what will lead us to achieve our goals. If you do not have the time, or expertise, to develop the belief in a strategy on your own, I would recommend seeking the advice of a CERTIFIED FINANCIAL PLANNER™. Charge them with earning your confidence through the development and communication of a coherent strategy you can believe in not only in good times but, more importantly, in bad.
Charlie Munger, Warren Buffett’s trusted partner for many years, has a famous quote: “The big money is not in the buying and selling, but in the waiting!” The takeaway from this is that regardless of your strategy/investment discipline, it only has a chance to work if you give it a chance to work. Believe, be patient, and success will follow!
For weekly insights, follow The Welch Group every Tuesday morning on WBRC Fox 6 for the money Tuesday segment.
Fox 6 Talking Points:
Creating Financial Contingency Plans
- Establish Your Own Personal Benchmark
- Believe in Your Strategy
- Stay Patient
Marshall Clay CFP, JD, is a Partner and Senior Advisor at The Welch Group, LLC, which specializes in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™. In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.