Most investors spend all their time focusing on things that are unpredictable and uncontrollable. It’s no wonder investing creates so much stress and anxiety. If you wish to maintain peace of mind as an investor, you must accept the fact that certain things are outside of your control and stop worrying about them. A better approach is to optimize the things you can control, let the world unfold as it may and adjust your plan when necessary.
Here are some of the most common causes of anxiety among investors that are actually out of their control.
Stock Market Performance
Although you can control the expected return of your portfolio by varying the asset allocation, you can’t control the actual return you earn. Even over long periods of time, the return you earn can differ greatly from the historical average for a portfolio with your allocation. Market timing and stock selection strategies that attempt to avoid the inherent unpredictability of the stock market typically fail to deliver what they promise. (For more, see: How to Avoid Emotional Investing.)
Even the most knowledgeable economists will tell you that it's extremely difficult, if not impossible, to reliably predict the movements of the economy. Perhaps more importantly, it wouldn't be that helpful to investors if we could because the stock market and the economy aren't that highly correlated. Just think of the last nine years - the U.S. economy has been recovering slowly until recently, but the S&P 500 Index has more than tripled since the market bottom in March of 2009.*
The Political Landscape
Nearly every election stirs up a lot of emotion and leaves about half of the population worried. Beyond casting your vote, there's not much you can do about the political landscape. Fortunately, businesses seem to find a way to innovate and increase profits no matter what craziness is going on in the government at the time.
Anyone who has been alive for a while knows that life will throw some curveballs at you. Unforeseen circumstances (death, disability, special needs child, etc.) will inevitably show up and may require you to adjust your financial plans, but there are many important financial decisions directly under your control that can drastically improve the likelihood of a good outcome.
Create a Financial Plan
Although it’s impossible to predict what may happen over your lifetime, it's still important to create a plan based on the information available to you today. A good plan will recognize the uncertainty in markets and life and be designed to work even in poor scenarios. It will also anticipate potential problems and protect against them. But don’t get too hung up on your initial plan - it’s highly likely that it will need adjustments over time due to changes in markets and your life. (For more, see: Why Market Timing Should Be Left to the Pros.)
Diversify Your Portfolio
While you can never protect yourself from (sometimes large) temporary declines in the broad stock market, diversifying your portfolio across many types of investments can smooth out the ups and downs and prevent you from being overexposed to a single company or asset class.
Minimize Costs and Taxes
This seems obvious - the less you pay in expenses, the more money you keep in your own pocket. I’m not just talking about expense ratios. It's also important to consider the "hidden" costs that are often overlooked such as trading costs and taxes. You can minimize trading costs and taxes by investing in mutual funds with low turnover and by holding tax-inefficient asset classes such as real estate investment trusts (REITs) in your retirement accounts.
Although this is the hardest to quantify, it is the most important item on this list. Unfortunately, it's common for investors to sabotage their perfectly good financial plans and investment portfolios by behaving inappropriately. Inappropriate behavior shows up in many ways, but the most common are "performance chasing" (shifting your investments around based on past performance) and "panic selling" (selling during a market decline). If you are going to have any chance of financial success, it’s essential to avoid these types of emotional decisions. You can’t choose your external circumstances, but you can always choose how you respond to them.
Stack the Odds in Your Favor
Where is the market going? Is the Fed going to increase interest rates? These are the wrong questions because the answers are unknowable. The impact on your portfolio is uncertain and the outcomes are beyond your control. You might as well stop worrying about them.
Instead, I encourage you to ask yourself: Does my financial plan have a high probability of success? Am I properly diversified? Am I minimizing costs and taxes? Am I confident I will be able to stick with this plan and investment portfolio no matter what? If you answer "yes" to the second set of questions, then you have stacked the odds in your favor. All you can do from there is accept events as they unfold and adjust your plan as necessary to make sure you always maintain your financial independence. (For more, see: 4 Reasons Why Financial Plans Go Wrong.)
*Past performance is not an indication of future results.