You Know More about Investing than You Think

Uncertainty Creates Opportunity

“The best antidote to uncertainty is educated optimism.”

David Booth

Uncertainty can be uncomfortable, but we often forget that, without it, there would be no opportunity. When we decide to move to a new city or change career paths, we don’t know exactly what will happen. There’s always a risk that things won’t work out the way we had hoped, yet these experiences help us grow and can change our lives in amazing ways.

When you invest, expected returns are compensation for taking on uncertainty. Without risk, there would be no reward. But there’s also risk in choosing not to invest, because if your money doesn’t grow over time, it won’t go as far in the future. Cash hidden under a mattress can’t keep up with inflation.

As investors, it’s easy to get caught up in worrying when markets drop. But when we realize that investing means getting paid for accepting risk, we can start to see uncertainty as a source of opportunity, even during times of market volatility.

Plan, Don’t Predict

“Plan for what can happen, rather than trying to predict what will happen.”

David Booth

We’ve all tried to predict what will happen in life, only to be disappointed when it didn’t turn out the way we anticipated. But human beings develop strategies to deal with the fact that none of us has a crystal ball. We apply to a list of potential colleges, not just our first choice. We interview a series of job candidates even when there’s a clear front-runner. We wear a life jacket on a boat even though we know how to swim.

Investing is just like life: For maximum peace of mind, we make plans that account for a broad range of possible outcomes. This way, you can feel empowered by the unknown instead of paralyzed by it.

Research has shown that stock pickers consistently underperform their benchmarks.¹ But you don’t need to be able to predict winners to have a good investment experience. Over the past century, markets have returned, on average, about 10% a year.

Flexibility Adds Value

“Flexibility adds value because it leaves space for judgment.”

David Booth

When you’re in the market for a new car, you probably know exactly what you want, down to the color of the interior trim. But it can be hard to locate the precise model and features you’re after, unless you’re willing to pay a premium for them. Being flexible—maybe going with black instead of gray or sacrificing a sunroof—might mean you can get that new car faster, and at a better price. Life rewards flexibility over rigidity.

Flexibility adds value in investing too. Staying flexible around what stocks to hold and when to trade can give you an advantage. While index funds are a solid, low-cost solution for many investors, they are forced to trade on certain days to track their index. The funds may not get the best prices on the securities they hold, resulting in investors leaving returns on the table.

Harness the Power of Compounding

“Your life is the result of the cumulative effects of the decisions you make every day.”

David Booth

Even the small, seemingly inconsequential decisions we make every day can have a big impact over time. Whether we’re trying to run a faster mile or master a foreign language, the best way to stay motivated is to keep reminding ourselves of the rewards that come from patience and commitment. Just a little bit of time every day can add up to a lot of progress.

The same is true of investing. A 10% return on your investment each year—similar to the stock market’s historical annualized average—would double your money every seven years. Having a lot of time can help an investor make up for not having a lot of money.

Control What You Can Control

“While you can’t control the world around you, you can control how much risk you take.”

David Booth

So much in life—good and bad—is out of our control. Sudden storms can pummel us in the middle of summertime. A sports team that seemed destined for a disappointing season can come out of nowhere to win a championship. While we can’t control everything that happens, we can take charge of how we prepare for and react to life’s curveballs.

As human beings and investors, all we can do is try to make the best decisions possible with the information we have available, plan for a range of outcomes, and relax knowing we’ve taken a sensible approach.

In investing, you can’t control the ups and downs of the market. What you can control is how much you save, the risk you take on, and the guidance you seek in putting together an investment plan that’s right for you.

Tune Out the Noise

“When it comes to investing, a lot of things are interesting without being meaningful.”

David Booth

When you focus on an important goal, other people’s opinions can be distracting, even derailing. Who cares if a friend doesn’t agree with your new exercise plan, as long as it’s working for you? Once you’ve done the research and come up with a road map for success, rally your supporters and turn down the volume on your detractors.

This mindset is also key to being a successful long-term investor. Many of us are exposed to a barrage of investment commentary—for example, TV pundits handing out stock tips and friends touting the “next big investment.” As tempting as the ideas may sound, they’re potentially harmful distractions. Things that seem too good to be true usually are—and yielding to your “fear of missing out” can exact a deep price in the form of lower returns over a lifetime.

We all know that markets rise and fall—so we can be disappointed by downturns, but we shouldn’t be surprised by them. Reacting emotionally, like selling when markets fall, may be more detrimental to your portfolio performance than the drawdown itself.