We Worry About All The Wrong Stuff

Reflecting on almost 15 years worth of client conversations, I've noticed a trend that many investors tend to focus on things that matter very little while ignoring related items that actually create a meaningful impact on their success. Humans have a tendency to get hung up on all the wrong stuff, many times with a self-inflicted obstinance no amount of logic will ever override.

This isn't just a financial phenomenon. Two weeks ago I went in to my orthopedic clinic for some cortisone injections associated with back pain. After being escorted to my room, I immediately noticed the remnants of the previous victim. But when the nurse walked in to prep me, she couldn't get over the plastic glass of water left on the table. I'm thinking never mind the freaking water, what about pile of discarded syringes and bowl of obviously used human wipes left in the bowl???

Proof I'm not just making this up...

So here's my list of financial hangups. If you find yourself experiencing any of these symptoms, don't be like my nurse. Try your best to quit focusing on all the wrong stuff.

Getting Out Of Debt

Almost each week someone asks me if they should accelerate paying down their mortgage or student loans. While I commend this type of financially responsible thinking, doing so often comes with an easily overlooked opportunity cost. Since 1996, a 60% stock stock / 40% bond "balanced" index has returned 7.64%*. But most mortgage interest rates are fixed at a low 4%, meaning you get almost twice the bang for your investing buck compared to the cost of borrowed money. Don't worry so much about getting out of debt. Worry that you're not saving enough for your future.

Picking Stocks

Just because you bought Netflix in 2008 doesn't mean your a genius stock picker! You don't have the savvy skillset to consistently pick corporations before they become winners, so get over the idea that you can do it again. When we look at market data which dates back to 1926, we find that the entire gain of the US stock market is driven by only 4% of stocks**. Knowing that such a small subset of stocks has driven the entirety of the return, the likelihood you pick another Netflix is so much lower than what you what your overconfident brain convinces you it is. Quit thinking you're Warren Buffet and buy a diversified index fund already!

Paying For College

I know you love your kids, usually, so this one is going to sting a bit. Prioritizing college savings over your own retirement is a flawed strategy, so take a moment to properly reevaluate your future reality. What if you sink your extra cash into a college savings plan like a 529 and your kid 1. doesn't go to college, 2. drops out, or 3. gets a scholarship? If any of those happen, you're forced to use the money for non-education related expenses, wiping out the main tax advantage of a 529 plan! Better to adhere to the old saying "you can always finance higher education, but you can't finance your retirement".

The Returns Of The Past Equal The Returns Of The Future

Although occasionally we acknowledge that our thinking is a product of our own bias, we still tend to equate yesterday's exciting return with tomorrow's. This can be especially dangerous in long periods of market appreciation like the last 9 years. Instead of assuming your investments will continue to crank out gains above the historical average, determine the least amount of risk you need to take to reach your goals within the context of a financial plan. Adjust your portfolio to reflect that risk, not the hair-brained-all-in-risky growth strategy you think will continue indefinitely.

Buying Insurance

The amount of underinsured people is staggering. If the possibility exists that you could get sick and can't work (or manage the household), become unable to perform all your daily functions like bathing, dressing, grocery shopping, etc, or die during your working years, then you're a candidate for insurance. Please don't tell me anymore that your solution to these perils is you're just going to wing it, pray for a solution, or run to a relative for help! To borrow a "bro" phrase, Man Up. Plan on spending 2%-5% of your income on protecting that very income you're so undeniably dependent on! Stop fretting over the ridiculous idea that buying insurance will blow up your lifestyle. I promise there is something less important than insurance you're currently spending money on.

Don't Assume Anything

You think everything is going to go exactly according to plan? Pffftttt... The market will crash. You could lose your job. A sibling could screw you out of an inheritance. Your kids might never pay you back. If you rely on only what you hope will happen, life will disappoint you. Make the best of what you have while you have it. Acknowledge and plan for the day things just don't work out so when you get smacked in the face you don't come completely unhinged.

* Source: Dimensional Returns Web, Dimensional 60/40 Balanced Strategy, 8/1/1996 - 3/31/2017.

** Source: Do Stocks Outperform Treasury Bills? Bessembinder, Arizona State University, 2/18/2017.

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