The financial and investing journey is similar to competitive sports. Both endeavours require you to make skilful decisions under pressure with a calm mindset, and very often, your biggest competitor is yourself.
One aspect in which they differ is that when it comes to investing, thinking is often more important than doing. In fact, it can be argued that the best investors do less rather than more. Given this, the investor’s mindset is crucially important in determining lifetime success.
For those who have the simple but noble aspirations of becoming (and remaining) financially independent and leaving something behind for those they love, a few key mindsets can be enough to set them on the path to financial salvation. In the same way that hitting a good golf shot is easier from the short grass of the fairway than from behind a tree in the rough, expecting to continually make sound financial decisions while thinking the wrong thoughts is unrealistic.
The following three mindsets will provide a solid foundation for your future financial success.
We know that spending less than you earn (whether this is your paycheck or pension) is a foundational financial habit. However, shaming those who are spending more than they should is unlikely to lead them to better budgeting practices.
A better way of framing this habit is to understand that you always have a choice between owning a new thing or owning more of your future. Every extra golden coin you keep for the future is you gaining more control over your life. It’s not about buying something or not; it’s about what you’re buying. Wise investors know that living below their means results in them owning more of their future.
As Morgan Housel wrote in “The Psychology of Money”, “Saving money is the gap between your ego and your income, and wealth is what you don’t see.”
The second mindset we want to encourage is the conscious choice between short-term and long-term security. For many investors, this trade-off is unavoidable. Growing your investment pot to retain purchasing power and provide a retirement income requires sacrificing short-term security (money in the bank) for growth assets that provide long-term comfort.
The idea that you can simultaneously have both short-term and long-term security is unrealistic for most investors. This does not mean that your plan can’t allow a certain amount to be kept for short-term purposes, but it forces you to grapple with this trade-off and the unavoidable consequences.
The third mindset is about becoming comfortable with observing the events you have no control over without feeling pressured into reacting in a way that will harm you in the long term. It forces you to acknowledge what factors are truly under your control, and this is where your energy is best spent on.
Our world presents a never-ending series of surprises and challenges that no one can foresee. Yet, the best investors find a way to observe without reacting, instead choosing to act proactively on the plan they have put in place.
These mindsets will not automatically lead to wise decisions. However, especially for those working with a caring financial adviser, they will set the foundation from which financial decisions can be made without becoming mired in the complexities that often don’t move the needle.
By regularly returning to these key thoughts, you can safely retreat to a secure base when life and market events become overwhelming. We invite you to let us know which of these mindsets resonates most with you, and we are committed to incorporating these foundational mindsets into your unique financial planning circumstances.