Personal Finance and the Serenity Prayer
As children, many of us learned this short prayer:
"God grant me the serenity to accept the things I cannot change;
the courage to change the things I can; and wisdom to know the difference." What does this prayer have to do with Personal Financial Advice?
Last May, the research firm, DALBAR, Inc., released their 23rd Annual Quantitative Analysis of Investor Behavior. The study shows that in "2016, the 20-year annualized S&P return was 7.68% while the 20-year annualized return for the average equity mutual fund investor was only 4.79%, a gap of -2.89%." Why is there such a difference?
One word; behavior.
The study discusses the various psychological reasons for why the average investor makes poor decisions that lead to poor financial behaviors. The same behaviors that often result in investors buying when the market is too high, selling after a downturn when it is low, and thereby locking in their losses.
As individuals, we have no control over the stock market, the economy, or world events. We can only control our behaviors as we react to the external world.
We can control how we react to changes around us. That is easily said when the economy and the stock market are doing well, and your investments are regularly growing. That is not so easy when the economy or the market makes a prolonged downturn as it did in 2008.
So what are some things we can do to help control our behavior, no matter what happens in the market, economy or the world?
1. Set goals for your present and future self. Write them down. If you keep the long-term view in focus and visualize the future that you want, you may be less likely to get distracted by current events.
2. Live on less than you make. Make a budget and stick to it. Give every dollar a purpose.
3. Pay yourself first. Your budget should reflect your values, not only your living expenses. If you are serious about your future self, you will make it a priority and fund that line item first.
4. Invest regularly. Harness the power of Dollar Cost Averaging. Most of us do this every month already by contributing to our retirement plans at work or our Individual Retirement Plans.
5. Diversify your portfolio over several asset classes: cash, stocks, and bonds. Your specific allocation should be based on your goals, your time horizon, and your ability to tolerate a short-term loss.
6. Keep your investment costs low – operating expenses do matter. Analyze what you are paying to own that annuity, that bond, or stock mutual fund in your portfolio. Investors often find that no-load indexed mutual funds can be less costly.
7. Rebalance your portfolios at least annually so that you are not over-weighted in one particular asset class.
8. Seek out professional advice.
Over the next few months, we will explore each of these in more detail in the hope that we will all gain "the wisdom to know the difference."