‘Beyond returns, a good investing experience depends on how you feel on the journey – just like in life.’ David Booth.
Having our finances in order makes life so much easier, and while money does not necessarily make us happy, it does provide us with choices, opportunities, and experiences. The purpose of investing should be to help us live better and more fulfilling lives. Instead of fixating on maximising returns, we should view money as a tool that empowers and facilitates our plans rather than as an end goal.
I recently read an article by David Booth, who founded Dimensional Fund Advisors and has donated over $300 million to his old school, Chicago University. David provides us with six principles that not only shape successful investing but also provide valuable insights for navigating life’s uncertainties.
1. Embracing Uncertainty
Booth emphasises that uncertainty is not a hindrance but an opportunity. Life’s pivotal moments, such as moving to a new city or changing careers, are inherently characterised by uncertainty yet often lead to reward and growth. Similarly, in investing, returns serve as the reward for embracing risk. There is also risk in not investing, as without risks, there are also no corresponding rewards. Acknowledging and navigating uncertainty can lead to both personal and financial growth.
2. Plan, don’t predict
No one has a crystal ball in life or in investing. Booth encourages us to focus on planning rather than attempting to predict the unpredictable. Research has consistently shown that returns from share markets are not predictable. Instead, focusing on creating plans that consider a range of outcomes can empower us to face an uncertain future with greater confidence (much like packing extra necessities for a holiday!)
3. The Value of Flexibility
Flexibility is a key attribute, whether shopping for a car or managing our finances. Life is full of surprises and maintaining readily available funds can increase our comfort and peace of mind and help to reduce anxiety and stress.
4. The Power of Compounding
Booth emphasizes the significant impact of compounding, both in life and investing. Small, consistent efforts lead to substantial results over time. With a 10% annual return – akin to the historical average of the share market – an investment can double every seven years. Starting early and maintaining consistent contributions, even with modest amounts, can lead to remarkable financial growth. KiwiSaver is a great example of this, as it automates investing on a regular basis. In life, we also see enduring benefits to undertaking some form of exercise every day.
5. Control What You Can
So much of our life is out of our control; nonetheless, we can take charge and prepare for life’s curve balls. In investing, we cannot control the ups and downs of capital markets, but we can control how much we save, the risks we take, and the guidance and research we seek in formulating an investment plan that is right for us.
The future is uncertain, but the quality of our decisions doesn’t have to be. Even if things do not turn out right, we can still be satisfied knowing that we did everything within our control.
6. Tune Out the Noise
In a world inundated with opinions and distractions, Booth advises us to tune out the noise. The deluge of investment commentary from the TV, well-intentioned friends hyping the next big thing, or our cell phones bombarding us with the latest news can be overwhelming. Over time, things that seem too good to be true usually are, and yielding to the “fear of missing out” can lead to suboptimal returns.
In conclusion, David Booth’s principles extend beyond financial advice. By integrating these principles, we can view money as a tool that empowers our plans and helps us foster a more fulfilling life journey. Booth’s wisdom serves as a reminder of the importance of resilience, adaptability, and taking a long-term perspective – in life and investing.