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Investing Needs a Future
Do you know what you are investing for?
Investing Needs a Future
What are you investing for?
The other day, I was listening to a podcast with entrepreneur coach Dan Sullivan. He had this to say:
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People stop spending and investing because they don’t believe in the future.
Sullivan went on to say recessions occur when we collectively stop believing in a bigger and better future.
I was so intrigued by this idea. What a fascinating way to think about the business cycle and the ups and downs of consumer confidence.
The quote fits perfectly with one of my tenets: Invest for a better future.
Invest for a better future.
If we aren’t attached to the future, there is no need to invest. Nothing is pulling us forward.
There is no investing without a future.
Our Ideas of the Future Pull Us Forward
Research shows that our actions and behaviors are not driven by our past so much as we are pulled forward by our future1.
When investing, the idea is to buy low and sell high. We all know this. Yet, investors regularly do the opposite.
In fact, the average investor dramatically underperforms the market because they panic, sell during down markets, and only buy back in after the market has gone up. They invest according to their feelings rather than a plan or set of principles.
This is evident in the chart below. The average investor underperformed buy and hold strategies in stocks, bonds, and a 60/40 combination of the two (60% stock, 40% bond portfolio).
To connect this to the Dan Sullivan quote, people sell at the bottom not because they are nervous about the present but because they have stopped believing that the future looks better than the present.
What do you think?
Are you optimistic about the future? How does that impact your financial decisions?
Do you have a set of investment principles?
How do your investment principles flow into your financial plan?
Future Self and Retirement
Do you ever think about your future self? Who will you be in a week? A year? A decade? Two decades?
Retirement planning involves thinking a great deal about your future self. The plan you create must be beholden to two realities: Your present needs and desires and the needs and desires of the person you are 5, 10, 20, or even 30 years in the future.
I tell my clients that two people are sitting at the table with us. The person sitting across from me, their present self, and their future self, the person we are trying to set up for success so goals and aspirations can be achieved and life can be lived to its fullest.
We must hold these two realities closely. Both are dear to me as a financial advisor. Both should be dear to you because the future you is, well, you!
I believe great financial planning is caring for the you 20 years in the future as much as I care about the person sitting across from me. The plans I create and the advice I offer are beholden to both realities, present and future.
Your future self is a stakeholder in your present financial reality. The decisions you make now dramatically impact their/your situation.
Investing Creates Tradeoffs
Investment decisions create tension as there are always tradeoffs between present wants and future desires.
Sometimes, individuals want to pull spending forward. I want a new car now instead of letting this money compound over the next ten years in the stock market.
To be clear, if it is in your financial plan, you should spend the money. We live for today, AND we plan for a better future.
But what if your financial plan does not support increased spending and that money would better serve your future needs?
In that case, try conversing with the ‘you’ 5, 10, or 20 years in the future and say, “This is for you.”
Feel your gratitude.
Have a conversation with your future self. Tell them you are saving money so they can live their lives to the fullest and achieve their goals and aspirations. Do they feel grateful? Do you? Are they appreciative? Are you?
Other times, retirees neither spend nor invest.
They keep the money in cash or other low-risk/low-reward investments.
This is an individual who is neither living for today nor tomorrow. When we cling to cash, shoving it under the proverbial mattress, we hide from the future. We are neither investing in a better future nor actively seeking to create it.
As you can see below, returns on cash, as measured by 3-month US Treasury Bills, have trailed inflation since 2009. Starting toward the end of 2020, this difference became quite dramatic as inflation spiked and the Federal Reserve, still concerned about the economic fallout from the pandemic, was reluctant to raise rates immediately.
Everyone should have an appropriately sized emergency fund. The above is not an argument for not having any cash on hand. However, your emergency fund should reflect financial realities and needs, not unfounded fears.
Retirees who keep most of their investment portfolio in low-volatility investments, like cash and bonds, fear the future. There is no other explanation. They do not believe that the future, their own or our collective future, is worth investing in.
Some money should be kept in cash or high-quality short-term bonds to fund an emergency fund and near-term cash flow needs or other short-term goals.
And for the rest?
History says it should be invested in a diversified portfolio of global stocks. See the blue line in the chart of stock market returns below. Without taking undue risk, that’s the direction you want your portfolio headed to satisfy your needs and desires over the next 10, 20, 30 years, or more.
Investing needs a future. In fact, there is no investment without considering the future. As you consider your financial plan and investment strategy, I urge you to ask yourself, ‘why?’ Why am I doing this? Who am I doing this for?
The answer may be your future self and his or her needs 20 years from now. It may be your grandchildren. It may be to fulfill some yet unfulfilled aspiration.
Regardless, the ‘why’ matters a great deal. If you haven’t yet uncovered that answer, I urge you to find one.
Your retirement plan should not just consider the ‘you’ now. There is another ‘you,’ the future ‘you’ who you must hold dear in your planning.
Last, that future you are planning for should be big enough or wonderful enough to pull you forward. Your future should not be an afterthought. Invest in it. Invest for it.
As we say in the RISE framework: Invest for a better future.
Seligman, M.E., Railton P., Bumeister, R.F., and Sripada, C. 2013. "Navigating into the future or driven by the past." Perspectives on Psychological Science 82, 119-141.