Which Way I ought to go from here?
Whilst reading the story of Alice in Wonderland this short exchange between Alice and The Cheshire Cat resonated with how I try and help clients think of their investments differently and build personal financial plans for them and their family.
Alice: “Would you tell me, please, which way I ought to go from here?”
The Cheshire Cat: “That depends a good deal on where you want to get to.”
Alice: “I don’t much care where.”
The Cheshire Cat: “Then it doesn’t much matter which way you go.”
Alice: “…so long as I get somewhere.”
The Cheshire Cat: “Oh, you’re sure to do that, if only you walk long enough.”
Down the Rabbit Hole
Reading this, I thought it could absolutely apply to financial planning and investments.
How can you pick a road to somewhere when you don’t know where you are going? How do you ‘get there’ when you don’t know where there is? Just like any good trip, you can’t possibly plot a specific course or plan the journey if you don’t know where there is.
The Pool of Tears
Likewise, without a proper investment strategy and goal in mind, what’s to keep the average investor from making poor decisions that could end up diverting them from wherever their there is?
“No matter what the state of the markets, boom or bust: Investment results are more dependent on investor behaviour than on fund performance. Fund investors who hold on to their investments are more successful than those who try to time the market.”
Quote taken from Dalbar Inc – a company which studies investment behaviour
A Mad Tea-Party
Investor behaviour is illogical and often based on emotion. This does not lead to wise long-term investing decisions.
Study after study shows that when the stock market goes up, investors put more money in it. And when it goes down, they pull money out. This is akin to running to the local department store every time the price of something goes up and then returning the merchandise when it is on sale - but you are returning it to a store that will only give you the sale price back. This irrational behaviour causes investor market returns to be substantially less than the historical market returns.
To quote Gene Fama Jr., a famed economist, “Your money is like a bar of soap. The more you handle it, the less you’ll have.”
I believe it’s because they don’t have a plan in place to drive their investment decisions. As such, they’re relegated to making emotional decisions that have detrimental impacts on their long term goals.
Would you try to build your home without any drawings? Would you want a surgeon to blindly start cutting without planning out the surgery? If not, then why build your wealth and long term financial wellbeing without a plan?
Alice’s Evidence
As you think about your own family’s financial future, consider how you’ll approach managing and building your wealth and investments. Take some time to consider the lifestyle you want to achieve (and maintain) for yourself and your family.
Whatever you do, don’t be Alice and ignore your financial future in the hope to simply get somewhere. If you walk long enough, you’ll get somewhere, but why not make a plan and get to where you really want to go!