learn to think bigger

Foolish consistency is the hobgoblin of little minds.

– Ralph Waldo Emerson, Self-Reliance


Creative Commons License photo credit: marfis75

When beginning any sort of ambitious self-improvement project – be it paying down credit card debt, investing, losing weight or reading the 100 greatest books of all time – you should have a clear idea of when to cut your losses and try a different path.

I have seen many people attempt to avoid quitting at all costs. You know the type – your friend who insists on watching the movie to the end.  Your cousin who will eat the same brand of pizza that gave him heartburn last time.  People who furiously pay down debt by directing every last penny to paying it down while eating Ramen noodles.  Being someone who can stick to a goal and achieve it is admirable.  Being someone who sticks to a goal that has ceased to benefit from that goal is foolish.

The best example in terms of personal finance can usually be found in investing.
Many investors will establish a pattern of investing that suits them, and then defend that pattern to others (and to themselves) even if it doesn’t work.  A good example is index fund investing.  The conventional wisdom is that it cannot fail.  The truth is that it’s the investing pattern with the best possible return for a non-knowledgeable investor, but even then it’s subject to a number of caveats.  If you happened to be withdrawing your money now, the last eight years would have been essentially 0% returns on those funds.  A dividend-paying stock, or better yet an investment in a single company that had a great run over that time (think Google, for example) would have been far better.

A foolish consistency – an attempt to hew to a failed philosophy – is going to be the road to failure for most of us. If what you’re doing isn’t working, it’s unlikely that it’s going to improve.  I know that persistence is considered to be a virtue, but in investing or life it isn’t.  You have to admit that what you’re doing isn’t working sometimes, and try to find an alternative.  In investing, this is called cutting your losses.  If you invest 10,000 and lose 2000, you need a 25% gain to recoup your 20% loss.  Think about that.

So think bigger. Think about moving past goals.  Think about ambition and think about money like something new, every day.  I’m constantly reevaluating my goals and my ideas about how to generate (and grow) my money, but not as much as I should.  If you get to a point where you’re comfortable, you’re in bad shape.  Life requires growth, in one form or another.  Think bigger.

9 comments

  • I think the way that “think bigger” applies to investing is to start off learning with index funds but go past that. Learn to invest in individual companies, learn about dividend stocks. But I still think index funds are the way to go for most people — they just don’t have the time or energy to learn the details and nuances of stock investing.

    Personally? I have around 90% index funds in my portfolio. The rest is individual stocks (where I’m trying to find a great company that will grow in the short term). For long-term investing, index funds are the way to go. Do you really think you can pick stocks successfully for the next 30 years?

  • I recommend reading the “Four Pillars of Investing”. 🙂

    Investing is long term – ie 15-20 years or more. Admittedly if you wait 20 years to admit failure then that’s a problem!

    Index investing is not a “no lose” proposition but is instead a method of investing where the average investor can get better performance than with active management. I don’t believe that anyone can ‘beat’ the market for any length of time so for me, it’s a no brainer that index investing is a better method. Diversification is another key to successful investing – yes, it ensures that you will never get rich but it also helps avoid things like over concentration in American banks (for example).

    To me, investing is just part of the process which involves, financial goals, financial planning and savings. All of those steps are important, not just how you did compared to the market.

    Mike

  • You are right.

    We have to know what we have to live with and what we have to change, and when.

    We have to know when we should be defiant against all odds and when we should accept defeat.

    Now if we only had the wisdom to know which was which….sigh..

    Regards

  • Right on.

    For me, I call this idea of thinking bigger “living consciously.” It’s recognizing that all of your actions have consequences. And just like your parents told you, you get to chose the actions, but not the consequences.

    I like what you said about not getting comfortable. What works in one circumstance may not in the next. What works one day may not the next. It’s not just about investing, it’s about everything in your life. You have to be always evaluating, choosing your actions and watching the consequences to make even better choices next time.

    Thanks for a great post.

  • Brip Blap,

    A 10 year period is “noise” in my opinion. Actually being more passive when it comes to investing can actually increase your results, because you get better tax treatment, you spend less on commisiions and trading software. Last but not least, you get more free time. Over the 10 years that I have been investing i have seen a lot of people who think that they could actively trade the market and outperform it by picking the “next microsoft”. They seldom do well.

    I think that index funds are perfect for 95% of the people out there. If you have more than 500K, and you are willing to manage your money and you are able to return at least 10%/year every year,then by all means go for it. But unless you can prove that you can do this consistently then I would stick to index funds.

    When I was an active trader I was able to beat the index almost every year for several years.. But since I had a smaller amount to start with my time in actively managing my money was not paid well. At the end of the day I was doing only a little bit better than an index fund. But I paid much higher expenses than an index fund..

  • This is a great post that has inspired me to make a small change that is way overdue.

    Regarding our investments, I think everyone is reflecting heavily right now.

  • Good points! Yes, I definitely love to defend index fund investing. It’s the simple way to go for the long term. But if you’ve got the knowledge, experience, patience, time and fortitude to go beyond the simple, then why not? I like index fund investing because I don’t like having to monitor my investments so closely. I’m willing to sacrifice extra returns for the convenience of having my money as close to auto-pilot as I can have it. And I’m not complaining… 🙂

  • Last year I sold my living room furniture via Craigslist. I had to use the money for car repairs and medical bills from surgery and related costs. Although I have been using an old wooden, uncomfortable rocking chair since last June as my only piece of furniture to sit on- I do it every day, sit on it, I mean. The saddest part about selling my furniture was that my dog came running into the room after the couch was gone and he looked at me in disbelief. I wish I hadn’t sold the couch as my dog passed away last September and he and I cuddled on that sofa. Sitting in the rocker is me not quitting and buying furniture which I don’t like and which will be empty without my furry friend. Sorry for the tone of the post. It’s just quitting and losing someone well loved are closely entwined- a feeling a emptiness and regret over letting go. Thanks for your thoughful blog- I just found it.

  • I loved the post. the tone is so peppy and so much needed in this time of gloom and doom. All we read about is inflation and bankrupcy and losing jobs.
    Hello there is life and till you are alive there is hope so dont lose it there