Why do you invest? This is the most important question that every market participant should ask themselves… prior to actually putting a dollar to work in the market. I know at first thought you may say to yourself; That’s a simple answer– To make money! I would argue that is not the real reason as to why you invest. Sure, making money in your investments is important but that is not your underlying goal. Stay with me for a minute…
Let’s take a step back and look at an example. Every year millions of people who live in a temperate climate are faced with the task of getting their backyard ready for the summer season. Furniture is dirty, pavers and fences need to be power-washed, decks need to be stained, and pools need to be opened. We do not clean our yard because it is simply dirty. The GOAL is to have a nice place to relax with your family and enjoy the beautiful weather. Yes, the yard is filthy from the winter but we don’t clean and tidy up the yard because it’s dirty. If this was the case then we would be out there with a ski jacket in January scrubbing down the tables and chairs. Cleaning the yard is the MEANS. Firing up the BBQ and and enjoying the yard is the END GOAL. Kicking your feet up on a lounge chair with your family around is the END GOAL. Think about that for a minute.
Investing in the stock market is also a MEANS, but I would argue that making money is not the goal. Yes…if you don’t make money in the market chances are you won’t hit your goal; but making money from the appreciation of your investments is actually the MEANS to your underlying goal. I believe that most investors fall into one of three categories of end goals.
– You are still working and are saving money for your future retirement.
– You are retired drawing on your accounts for income; and need to stay invested to keep up with inflation.
– You have a surplus of money and want it to be in a smarter place than a savings account. This category more than the other 2 may lead you to focus on “THE MONEY”, but your goal is still to make sure you are outpacing inflation and are putting your capital to good use.
All investors should be crystal clear on exactly what their END GOAL is when investing in the markets. Focusing on your goals will allow you to focus less on the fluctuations of your account. Just watching the balance in your account go up and down leads to the GAMIFICATION of investing. GAMIFICATION is probably an overused word in the last few years but it is very relevant here. We can get happy when our values rise and angry when they fall, but when we only do that we lose sight of why we started to invest in the first place. We can very well be doing much better than we originally expected (like most investors of the last decade), and far ahead of our important goals; but when we see our highest account value decline in the short run we get negative about the market and investing. In reality, we should be happy if we are hitting our GOALS regardless of what our account balance currently says.
Take a step back and look at your accounts on a 1, 3, and 5-year basis. Did you stay on track with your goals? Did you make all of your planned deposits? Are your monthly withdrawals still flowing while you are outpacing inflation? Is your money on track to outlive you? These are the real questions to be asked and focused on. If you lose sight of your goals you may hold back on putting new money to work by dollar-cost averaging because your value has declined when that is probably the best time to invest for a long-term holder.
For the investor who falls into the category of having surplus money, and having a good home for it I will say this. Look at investing this way. You want to outpace savings and inflation rates. When you own stocks you own actual pieces of businesses. Although, it seems like you simply have a 3 or 4 letter symbol with a price attached to it you should think about how you actually own a piece of the underlying business. If you own shares of Apple then you benefit from every sale of an I-Phone or Mac. The greatest wealth in history has been created by owning pieces of publicly traded companies for years on end. Focus on the fact that you are probably just putting money away for future generations at this stage of your life so that they could accomplish one of the aforementioned goals. Think long-term and always have realistic expectations.
When you focus on your underlying GOAL you can care less if it is labeled a BULL or BEAR market; or what the latest news announcement is. Who cares about the next “TIP” or “HIGH-FLYER”. You may think it matters… but it doesn’t, so don’t let media outlets and water cooler talk make you think it does. Make sure you review more than just your overall balances. Sometimes we need to get out of our own way for great things to happen. Get crystal clear on the reason you invest and monitor that. That is what matters most!