In Charge or In Control?

Do you seek to be in charge of your financial future, or are you trying to be in control? Being “in charge” implies that you are taking responsibility. Trying to be “in control” means you are attempting to command or regulate what occurs.

We often advise clients that “inputs determine outcomes”. This means that a conscious decision-making process drives these inputs and that they are directly tied to your specific long-term goals. What you save, what you spend, how you invest, and how you behave are factors where you can exert responsibility… where you can be in charge. While these variables directly influence outcomes, the specific results are very difficult to control entirely.

Those of us with the “Y” chromosome are particularly vulnerable to falling directly into the “control trap”. For some reason, men believe that the entire realm of personal finance is an area reserved for them and therefore can be “controlled”. Research done by Dr. Terrance Odean at UC-Berkeley confirms that men trade stocks more than women; hold on to losing positions longer, and achieve overall lower investment returns. So much for being “in control”.

We ask clients to accept the broad wisdom of the markets. This means giving up some “control”. Tens of millions of participants in the markets determine stock prices every day. Their collective wisdom trumps ours.

To think that any of us as individuals can systematically “control” these prices is not realistic. To believe that we know better than the millions of others is the face of the behavioral bias known as “overconfidence”. A 2012 study from the State Street Center for Applied Research found that most individuals rate their financial sophistication as “advanced”. Despite this high self-rating, the group scored an average of 61 on a basic financial literacy exam. There seems to be a huge disconnect between actual knowledge and perceived financial sophistication.

Doctors, lawyers, architects, and engineers are trained for their specific functions. Most investors are not trained to “outguess” the markets. Professor Odean says, “ Individuals aren’t as bad at picking stocks as many people think…they’re worse”. Ceding “control” is often the first step towards long-term financial independence. Ready for a real conversation?

Opt In Image

 

Complete the short form below and gain instant access to the FREE article: Perils of Investing: Solutions to the Top 10 Mistakes Investors Make

  • This field is for validation purposes and should be left unchanged.

, , , , , , , , , , , , , , ,

No comments yet.

Leave a Reply

Designed by Wired Advisor
Hosted by Zee Creative, Inc.