Successful Investors Focus on the Things They Can Control

Make the best of what is in your power, and take the rest as it happens. – Greek philosopher Epictetus (AD 55 to 135)

Concern or Control?

One of my favorite speakers and authors is Stephen R. Covey (1932 to 2012). In his wonderful book The Seven Habits of Highly Effective People Covey teaches that each of us has a multitude of things that concern us.  Covey labels this our Circle of Concern. Within this Circle of Concern is a much smaller list containing things that we can actually do something about.  Covey calls this our Circle of Influence, but I prefer Circle of Control.

Covey teaches that when we focus on things that concern us, but that we can’t do anything about, our influence decreases.  On the other hand, when we focus on things that we can control, our influence increases.  Successful people have learned that focusing on the things they can control is the key to making progress.

Concern, Control, & Investing

This concept has a direct application in the world of investing where most people spend far too much time worrying about things they have no control over.

The circle of concern for investors is wide indeed.  It contains:

  • Wars, rumors of wars, terrorist attacks, natural disasters, riots, unrest, and what politicians are planning to do to address the mess. In short, everything we see on the evening news. .
  • The condition of the economy. This includes keeping up on the GDP, the unemployment rate, the inflation rate, what the fed is going to do to affect interest rates, and other economic news and statistics too numerous to list.
  • How the markets are reacting to all the news. We are constantly bombarded with news about how the markets are doing, and what might be causing the markets to react as they are.

The things we can’t control are so numerous and far reaching that we are sometime tempted to throw up our hands in despair. That would be a mistake, because the aspects of investing that determine success or failure over a lifetime are squarely within our circle of control.  

The Circle of Control for investors includes:

  • How much we save: I have written elsewhere that I consider the personal savings rate the most important statistic in personal finance. If we don’t regularly save money we will never have anything to invest, but saving just 10 to 15 percent of our income over a lifetime will almost certainly lead to financial independence, even if we do make some investing mistakes.
  • The amount and types of risk we take: How we allocate our assets between stocks and less risky investments such as bonds and cash will have a far bigger impact on our investment return than what specific investments we make.
  • Investment costs: Most investors have no idea how much investment costs actually cost them, or how much reducing investment costs can increase investment performance. Vanguard founder John C. Bogle stated, “Great rewards grow from small differences in cost.” Learning how to reduce investment costs is a concrete step you can take to directly impact your investment performance.
  • Taxes: The amount of tax you pay on investment gains, and when you pay it, can be greatly reduced by making smart investment decisions. This includes making use of tax-advantaged accounts such as IRAs and 401(k)s and wisely managing taxable investment accounts to reduce the bite of taxes. Less money for the government means more for yourself.  
  • Our behavior (how we react to the things outside our control): Although we can’t control the things in our circle of concern, we can learn to control how we react to them. The exciting field of behavioral finance shows that most of us are prone to making the same types of mistakes. Learning what these mistakes are, and how to guard against them, is vital to successful investing.

Investing in index funds instead of actively managed funds has helped a lot of people focus more on the aspects of investing they can control. It does this by changing our goal from trying to beat the market, to trying to match the market.  This change in objective usually lessons our anxiety about many of the things in our investing circle of concern.  This will not only lead to better investment results, but also increased peace and happiness.  As Epictetus taught, “There is only one way to happiness and that is to cease worrying about the things which are beyond the power of our will.”

2 comments for “Successful Investors Focus on the Things They Can Control

  1. September 23, 2014 at 8:31 am

    I’ve found that being “selectively ignorant” about items outside your circle of influence can help calm the waters. First, you can’t do anything about it. Second, just not being as “aware” can keep it off your worry list. It isn’t always easy to bucket things at first, but I’ve learned that a lot of things just don’t matter all that much. Thanks for the interesting topic today.

    • Brent Esplin
      September 23, 2014 at 3:37 pm

      Very true. The problem today is too much information rather than not enough. Learning what to ignore is a very important skill in the information age.

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