If investing is simple why is it not easy?
- A Passion For the Investment Process
- It is no different from carpentry, gardening, or parenting. If money management is not enjoyable, then a lousy job inevitably results, and, unfortunately, most people enjoy finance about as much as they do root canal work.
- Mastery of the Basics of Investment Theory
- Investors need more than a bit of math horsepower, far beyond simple arithmetic and algebra, or even the ability to manipulate a spreadsheet. Mastering the basics of investment theory requires an understanding of the laws of probability and a working knowledge of statistics. Sadly, as one financial columnist explained to me more than a decade ago, fractions are a stretch for 90% of the population.
- Understanding of Financial History
- Investors need a firm grasp of financial history, from the South Sea Bubble to the Great Depression. Alas, this is something that even professionals have real trouble with.
- Ice In Their Veins
- Even if investors possess all three of these abilities, it will all be for naught if they do not have a fourth one: the emotional discipline to execute their planned strategy faithfully, come hell, high water, or the apparent end of capitalism as we know it. “Stay the course”: it sounds so easy when uttered at high tide. Unfortunately, when the water recedes, it is not.
Bernstein concludes with, “I expect no more than 10% of the population passes muster on each of the above counts.This suggests that as few as one person in ten thousand (10% to the 4th power) has the full skill set.”
While I agree with the importance of all four abilities I strongly believe it is having the emotional discipline to “Stay the course” that is what separates simple from easy.
As a former professional baseball player I’m often asked what separates the minor league players from the major league players? The overwhelming consensus, the mental game.
There are thousands of players with comparable abilities but very few have the mental discipline to overcome the adversity a player will face throughout his career. Those that do, reap the rewards.
Come hell, high water, how capable are you of controlling your emotions and making clear, probability-weighted investment decisions based on past experiences?
I understand that is can be difficult when you have little financial or market experience to have the guts to continue buying when things don’t look so good and markets are falling or going nowhere.
That’s why I believe choosing to work with a Certified Financial Planner professional is one of the best financial decisions you can make.