When you focus on what you can’t control, you are taking that focus and energy off of what you can. You can’t control some situations you will find yourself in, but you can manage yourself and your reaction to the situation.
When it comes to financial planning there are a myriad of factors that influence our financial lives. Although we cannot predict what will happen in the markets or to the economy, we can manage our reactions to these events by making a plan and sticking with it.
Most investors didn’t see the devastating 2007 – 2009 bear market coming, but by sticking to their financial plan and continuing to save and invest in the face of uncertainty they were richly rewarded. If you had started 2008 with a $100,000 portfolio invested in the S&P 500 you would have experienced a 37% drawdown by the end of the year and your portfolio balance would have been less than $63,000. Yet five years later in 2013, your portfolio balance would have been over $143,000 and at the end of 2015 your portfolio would have been $163,349. For many investors the outcome of this sequence of returns is satisfactory, although they may not have felt that way at the end of 2008. The point is that we can’t control the sequence in which returns happen in the markets, but we have a good idea of what returns will be on average and by continuing to invest and knowing our risk tolerance we know we can be successful in the long-run.
Sticking to your financial plan is one of the best ways to control your destiny. If you have a well designed plan that is tailored to your needs, temperament, and risk tolerance it will be much easier to follow when the situations out of our control inevitably come along.
Things you can control:
How much you spend.
How much you save.
How much risk you take.
Things you can’t control:
Stock market returns.